Tesla's Stock and Low-Cost Production in the Long Term

Following Tesla’s first-quarter earnings report last month, the company’s stock has fallen a bit as some air concerns about margins and net profits. Still, some Tesla shareholders are looking at a few key details to keep their focus on long-term potential, some of which were also discussed in the earnings report. 

Above: A Tesla Model Y (Image: Casey Murphy / EVANNEX).

In recent weeks, The Motley Fool’s Lawrence Nga has pointed to two specific talking points surrounding Tesla’s stock. While revenue growth and net income were stifled by price cuts in Q1, Nga recommends focusing on the company’s plans to become the electric vehicle industry’s lowest-cost producer, and on its impressive balance sheets — both of which he says “should produce tremendous benefits for the future.”

1. Tesla Wants to Become the EV Producer with the Lowest Costs

When Tesla first started cutting prices this year, headlines broke about the company waging a “price war” against other automakers, and for good reason. The move to become the pricing leader boosted sales volume in Q1 and may well continue to do so, ultimately expanding economies of scale and the company’s overall operating leverage.

In doing so, Nga argues that Tesla’s expanding economies of scale should help production costs go down even further in the future, letting the automaker make prices even more affordable. The cycle of falling production cost and increasing sales volume could someday push Tesla to become one of the largest vehicle producer in time, according to Nga.

As pointed out by CEO Elon Musk during the earnings call, deploying a high volume of EVs will also provide increased revenue streams in the future through autonomy, Supercharging and connectivity. Still, the strategy does hurt in the near term, as demonstrated by Tesla’s falling revenue in Q1 from Q4 2022, despite the increase in overall sales volume.

Nga posits that investors should focus on long-term potential, rather than near-term struggles, adding that it will take years for Tesla’s sales volume to truly show its benefits. However, the Model Y also became the best-selling non-pickup in Europe and the U.S. in Q1, showing a clear increase in sales volume.

2. Tesla’s Cash Balance Sheet is ‘Rock-Solid’

Secondly, Nga calls Tesla’s balance sheet “rock-solid,” with the company’s $22.4 billion in cash, cash equivalents and investments. It’s also noteworthy that Tesla almost went bankrupt just a few short years ago, despite the accomplishment. Most of Tesla’s revenue comes from its auto business, though continued growth in its Full Self-Driving beta, robotics, and energy storage businesses can also be expected in the years to come.

Tesla’s strong cash flow can help the company remain stable despite ongoing economic uncertainty when consumers may be less likely to make large purchases, like an EV. It also gives Tesla added flexibility in managing long-term objectives, such as the company’s plans to build a high-volume next-generation EV platform at an upcoming Gigafactory Mexico.

According to Musk’s statements during the call, Tesla is focused on reaching for its highest possible sales volumes right now, with the expectation that it will offer a platform for even more revenue in the future. While there’s no way to predict what may happen to Tesla’s stock in the coming months and years, Nga says shareholders should focus on long-term potential for gains, rather than short-term pain.

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