Tesla Inc. (TSLA, Financial) is arguably one of the most sought-after stocks in the market, with analysts asserting this popular electric vehicle manufacturer has yet to reach its peak.
Several factors support this sentiment. Tesla has been securing significant deals with prominent leaders in the auto industry, further enhancing its prospects. Moreover, the company's software and artificial intelligence endeavors present additional opportunities to bolster investor sentiment.
Consequently, the momentum behind its shares show no signs of slowing down. While there may be occasional obstacles, patient shareholders can expect to be rewarded. However, it is important to note that short-term concerns related to overvaluation are likely to persist.
Relentless in the pursuit of expansion
Through both strategic partnerships and new ventures, Tesla is showing why its growth story is far from over.
For instance, leading auto companies are seeking to leverage the EV maker's Supercharger Network. Recognizing the value of this technology, General Motors (GM, Financial) and Ford (F, Financial) have separately entered into partnership agreements with Tesla to gain access to it.
Starting in 2024, the Tesla Supercharger Network will be made available to GM drivers, albeit with the initial requirement of using an adapter. By 2025, General Motors anticipates equipping its electric vehicles with a NACs inlet, enabling seamless and direct access to Tesla Superchargers. This partnership demonstrates Tesla's efforts to capitalize on its early entry into the EV market, particularly as demand for its own vehicles faces some challenges.
In addition, through these collaborations,Tesla's objective is to position its charging infrastructure as the frontrunner in the industry and propel the adoption of electric vehicles in the U.S. Analysts predict a substantial 50% market growth in EV vehicles by 2030, making these partnerships crucial in driving the expansion of the market.
Software is a key source of revenue
Piper Sandler predicts that Tesla's stock could reach $280 considering the significant potential of its software opportunity and its impact on the company's profits in the coming years. The software aspect presents a substantial opportunity for Tesla, which is evident from the high price tag of up to $15,000 for its fully self-driving software. It is in this domain the company fully utilizes artificial intelligence to develop and enhance its software offerings.
First, Tesla's autopilot feature utilizes AI algorithms to assist with driver assistance and automation. It enables adaptive cruise control, lane centering and automatic lane-changing functionalities. The company's full self-driving technology takes it further by aiming to achieve complete vehicle autonomy, allowing the vehicle to navigate and make decisions without human intervention.
In addition, Tesla utilizes neural networks and deep learning techniques to process extensive data collected from sensors, cameras and other sources. These AI-driven networks analyze real-time data to recognize and interpret the surrounding environment, including road conditions, traffic signs, pedestrians and other vehicles.
Tesla leverages its extensive fleet of vehicles as a valuable resource for data collection and learning. The company collects vehicle data, including driving patterns, road conditions and real-world scenarios. This data is anonymized and utilized to train and improve its AI models, leading to continuous enhancements in autonomous driving capabilities.
Furthermore, Tesla's vehicles receive frequent software updates, often including improvements to their AI algorithms. These over-the-air updates allow the company to refine and enhance autonomous driving features, introduce new functionalities and enhance overall performance.
Tesla also employs AI algorithms to optimize its Supercharger network, which enables faster charging for owners of its vehicles. These algorithms analyze real-time data such as charging demand and station availability, dynamically allocating charging resources to minimize waiting times.
A rewarding investment
Tesla has not only experienced significant demand growth in recent years, but has also seen a noteworthy increase in its profit margin. This margin expansion has led to a remarkable surge of 1,000% in earnings per share from 2018 to 2022, supported by nearly tripled revenue.
The company's in-house design approach has played a crucial role in achieving cost savings by reducing the need for alternative products and materials. With a long-term goal of manufacturing 20 million EVs annually, Tesla aims to enhance efficiency, lower production costs and increase demand by lowering prices.
To achieve these objectives, Tesla has implemented several strategies. For example, it is constructing smaller factories specifically dedicated to producing the new powertrain generation. This strategic move aims to reduce costs and improve overall operational efficiency. Further, Tesla is actively designing its transistor packages, eliminating the need for rare earth materials in its electric vehicles.
It is also making concerted efforts to reduce dependence on costly semiconductors like silicon carbide. These initiatives showcase Tesla's commitment to innovation and cost reduction in its manufacturing processes.
Risks
Tesla and other EV manufacturers face a significant risk from price competition, potentially impacting their profit margins. To stimulate demand, the company has led several rounds of price cuts, including $2,000 for the Model 3 and $3,000 for the Model Y in April. However, this strategy risks compromising Tesla's profitability as other EV manufacturers lower prices to maintain competitiveness, particularly in the Chinese market.
Another concern is the overvaluation of Tesla's shares. As of June 15, the stock's price-earnings ratio stands at 75.53, putting it in a worse position than approximately 89.9% of the 891 companies in the vehicles and parts industry. The industry median 17.03, so Tesla's earnings multiple is significantly higher.
Takeaway
By focusing on cost-reduction strategies and increasing efficiency, Tesla can improve its margins over time. As the company successfully executes its plans and puts more EVs on the road, the market is likely to recognize and appreciate the true value of its growth potential.
Patient investors who understand this long-term perspective benefit from the company's efforts to drive profitability and ultimately generate better returns.
