Three reasons why Tesla stock will surge this decade
Tesla stock’s rocket-fueled rise has stalled of late—at this writing, it’s in the high $600 range, far below the all-time high of $880 that it saw in January. The main reason seems to be a feeling that the California carmaker isn’t going to be alone in the EV game for much longer—legacy automakers such as VW, GM and Ford have exciting new vehicles in the pipeline, and they’re investing serious money in battery plants and new production capacity.
Above: Tesla's Model Y (Source: EVANNEX; Photo by Casey Murphy)
For the first time, Tesla will be facing serious competition, and there’s no denying that this will be a challenge. However, it doesn’t mean that the party’s over for TSLA stock—far from it. As many have noted, Tesla is “more than just a car company,” and its stock price isn’t tied to the dynamics of the auto industry. As I argued in a March article, Tesla’s most important product is not vehicles, batteries, solar panels or even Robotaxis. The real product, which it continues to crank out at a dizzying pace, is disruptive ideas. As long as the pipeline of innovation keeps flowing, Tesla will keep growing, and TSLA should keep advancing.
As many a pundit has proclaimed, only a fool would bet against Elon Musk and Tesla—a Motley Fool, perhaps. Trevor Jennewine, writing in that august stock-market publication, recently offered three reasons why TSLA should continue to be an excellent investment over the next decade.
First, Tesla relentlessly pursues efficiency gains. In 2017, it introduced the 2170 battery cell, boosting energy capacity by 50%, with a commensurate decrease in costs. In 2019, Tesla brought Gigafactory Shanghai into service, slashing its shipping costs and delivering massive savings. In 2020, Tesla broke ground on two new Gigafactories, in Germany and Texas. Once the new plants come on line, which is expected to happen this year, they will deliver efficiency gains in several ways. Not only will Tesla save on delivery costs for European-bound vehicles, but it will be implementing a whole raft of new, more efficient manufacturing processes at both factories.
Tesla’s obsession with efficiency is no quixotic quest—it has delivered substantial cost savings. As Jennewine reports, “Since 2017, [Tesla’s] average cost per vehicle dropped 55% ($84,000 to $38,000) and Tesla achieved an industry-leading operating margin of 6.3% in 2020.” (So much for the naysayers who falsely claim that Tesla “loses money on every car it sells”).
Tesla’s second big advantage is closely tied to its first—the company continually innovates in every sphere of its operations, and these innovations not only save costs, they lead to better products, keeping customers happy and keeping Tesla a step or two ahead of any potential competitors.
Tesla’s battery innovations have given it the lowest costs in the industry—according to Jennewine, even the highest estimates put Tesla’s battery costs at $187 per kilowatt-hour, 10% cheaper than the closest competitor and 24% cheaper than the industry average. Lower battery costs enable an automaker to reduce the price and/or increase the range of its vehicles. Tesla is doing both—its EVs offer the longest ranges on the market, and while the current chip shortage, coupled with high demand, has recently led to price increases, the long-term price trend is surely downward. Last October, Elon Musk predicted that Tesla would be able to field a $25,000 car within three years.
CNBC Video Clip (0 - 2:00 minutes in): Ark Invest's Cathie Wood talks Tesla and her outlook on the company's future potential (YouTube: Business Wisdom)
The third reason Jennewine (along with many others) believes that TSLA stock will continue to soar is the company’s lead in artificial intelligence and self-driving technology. Switching from gas to electric drive will be a major technological transformation. Switching to autonomous vehicles will be a much bigger deal—it will trigger one of the greatest societal shifts in human history, analogous to the adoption of steam engines, computers, or the automobile itself. The potential income for the companies that enable this transition is incalculable, and Tesla is in position to lead the revolution.
Research from Ark Invest indicates that autonomous ride-hailing platforms could generate $1.2 trillion in annual profits by 2030, and that an automaker selling autonomous EVs could earn a tidy $250 billion each year. Tesla has a finger in both pies, and several advantages over other players in the space.
Tesla has over a million vehicles on the road, and their cameras are capturing video data as you read this—over 3 billion miles’ worth as of February 2020. The data libraries of Alphabet’s Waymo and other potential competitors are minuscule by comparison.
Tesla uses supercomputers to train the neural nets that enable its Autopilot system, and it recently unveiled a new machine that it says is the fifth most powerful in the world. An even more powerful processor, to be called Dojo, is slated to go into service by the end of this year. Elon Musk says Dojo will be an “order of magnitude” more efficient than existing supercomputers (there’s that efficiency obsession again).
Yes, TSLA stock is expensive, at a recent price/earnings ratio of almost 700 (though it has been much higher), but the company’s ethos of efficiency, its endless innovation, and its leading position in autonomous driving technology should make it one of the big winners in the coming clean-tech boom.