Tesla Inc. (TSLA, Financial) is one of the most recognizable companies in the world. It is always developing new electric vehicle models and introducing ideas to change the world for the better. With the company now entering the market of self-driving cars and energy solutions, the stock remain of interest to individuals who seek investments in clean energy technology products.
The company is on my list of long-term stocks with steady growth pegged on its core value proposition of excellence and competitive advantage. The future growth of Tesla can be centered on three strategic areas, which are artificial intelligence, robotics and autonomous driving.
Over the past 18 months, there has been more than one long-term buying opportunity for the stock. Currently, the market does not fully factor in the feelings and goodwill tied to the stock, which can only be sustained by the growth of Tesla's autonomous taxis. Investors and analysts are highly focused on its anticipated robotaxi business. There are some extreme projections about the value of a robotaxi business to Tesla. For example, Catherine Wood (Trades, Portfolio)'s ARK Invest has a $2,600 target price for Tesla by 2029, with a $2,250 value from the robotaxi service and $350 without it. That implies the robotaxi business could be valued at more than $5 trillion. Of course, there would be some fluctuations; however, I foresee that Tesla will become a market leader in autonomous robotaxis in the next 10 years, just like it did with electric cars.
Tesla's new bet
Known for openly sharing his thoughts, CEO Elon musk is quite different from other CEOs. He sees the autonomous robotaxis as the future for Tesla. During the first-quarter earnings call, he claimed investors should only focus on autonomy or not invest in Tesla at all. So, the viability, timing and ultimate success of the robotaxi business is essential for Tesla investors.
If scaled, one can safely argue that Tesla is likely to disrupt transportation as we know it with its autonomous taxi vision. Tesla enthusiasts will likely see the robotaxi having no steering wheel or pedals at all and, of course, the Robotaxi will feature full self-driving technology, which is the most important and critical aspect of this new product. This would put Tesla way ahead of its competitors and can either create its own robotaxi fleet or even leverage the technology to other auto makers through licensing in the future. For example, I believe Tesla is likely to partner with ride-hailing apps like Uber Technologies Inc. (UBER, Financial) and potentially further license out its full self-driving technology to third-party automakers.
How would it disrupt the automobile market you ask? The shift Tesla introduced with the robotaxi service can be seen as a change in transportation from car ownership to mobility as a service. By creating an autonomous taxi network, Musk's concept for Tesla cars could help to decentralize personal transport. According to McKinsey, transport costs could decline by 30% to 50% as compared to personal automobiles and by approximately 70% as compared to conventional ride-hailing solutions. I expect that, ultimately, Tesla will disrupt the economic structure of the transportation industry by popularizing private cars among average consumers.
Tesla continues betting big on its FSD product as the number of miles driven with the algorithm continues growing exponentially. The company also expects its AI training capacity will also grow multiple times by the end of 2024.
Financial and valuation analysis
Tesla announced its second-quarter financial results toward the end of July. The company missed its target with regards to the earnings per share consensus expectations, but did top revenue projections. Quarterly revenues grew 2.30% year over year, which is a positive turn after an 8.70% year-over-year decline in the preceding quarter.
The operating margin has also declined to 8.58% from 9.62% year over year, mainly due to a substantial increase in research and development spending. However, this investment in R&D corresponds to what I believe Tesla is pinning its hopes on, which is its strategy to differentiate itself radically through technological innovation over the long term.
Moreover, Tesla can afford to bet big on its innovation spend with the kind of cash pile it has right now. Currently, the company has a strong cash position of about $30 billion, and it does not have much debt; therefore, in my opinion, it is very well placed to sustain high capital expenditures for innovation. That high level of profitability indicates its investments in R&D are likely to generate significant upward yields in the future. The balance sheet side looks solid enough to allow Tesla to continue to execute on its strategic plan of increasing production capacity and R&D spending.
In terms of working capital, I find that management is handling the challenging situation well enough. Inventory turnover rates have held steady since early 2023, which is a solid indicator that management is handling the macroeconomics risks quite efficiently.
Full self-driving remains a core part of Tesla's portfolio and its future. With exponential growth in the number of miles driven using the technology, the company is improving the product's safety and sophistication. The recent release of the FSD v15 update is a testament to it, as it proves the company is continuously focusing on improving the software. As per the Global Times, China may approve Tesla's self-driving technology by the end of next year, which would be a major catalyst for the business considering its market in China is huge.
However, Tesla has recorded a 13% drop in share value over the past 12 months and is performing worse than the overall U.S. market. The stock has been equally underwhelming in 2024, declining by 7% year to date. The stock's valuation ratios remain high, primarily due to its historically high revenue growth and unmatched profitability in the automotive industry.
But for me, valuation ratios alone do not tell the full story. I want to highlight that due to the expected rapid earnings per share expansion, which is evident through the growth rates in the below chart, and with a growth rank of 10 out of 10, the price-earnings ratio will drop significantly in the coming years. This is backed by the analysts' expectations of a price-earnings ratio below 30 in 2028 and below 20 in 2031. Hence, at the present time, the valuation ratios of Tesla are justifiably high, implying that at this stage investors are willing to pay a premium for the stock.
When it comes to risks, in the short run, delaying the robotaxi launch to October has slightly dampened market sentiment regarding Tesla shares. I do, nonetheless, think that Musk and the company must take their time to make this important decision. Market timing can be valuable since first impressions matter and short-term opinions still carry some weight. During the annual meeting, Musk explained that the delay was due to some radical changes to the front end of the car.
"I think we've got kind of like one major hardware revision, which should be done by the end of this year or early next," he said. "Then we'll move into a limited production next year of Optimus. Limited production for use in our factories where we'll test out the product."
Additionally, insider trades over the past 12 months do not look very optimistic. While I generally do not look at insider selling as a warning sign, lack of any buying activity could mean they do not find the current valuation attractive.
However, the market seems less focused on short-term earnings and more on the planning and strategy being laid out for the autonomous taxi business in the long run. The macro environment is still constrained, but I expect it to ease in the next year following the U.S. presidential election. If we talk about Tesla's robotaxi, it is possible that the service can grow in tandem with macroeconomic expansion. With the worst behind it, the second quarter marks the halfway point of a difficult year for Tesla. As such, the market is starting to incorporate the positive outlook most analysts have for the organization's growth in fiscal 2025 and beyond into their decisions.
What lies ahead
I am assuming that like me, at one point everyone had Nvidia (NVDA, Financial) on their list years back when the PEG ratio was many times over the base 1 times figure. Usually, it doesn't really pay to overpay for growth, but once in a while, it's worth paying a higher price for it for the right stock. In this case, if the Tesla robotaxi model materializes, it could be the biggest game changer. Currently, shares are traidng around $221. While Musk has been talking about the robotaxi reaching full autonomy in the next three years, I expect it to take up to 10 years for it to come to an operational scale.
A good indicator for stock movement is comparing the current price with the GF Value and growth rank. GuruFocus has assigned Tesla a perfect growth rank of 10 out of 10. With a GF Value of $255.95 – quite the change from labeling it as a potential value trap three months ago- the stock has an upside potential of approximately 15%.
The company's operating margin is 7.58%, while the return on equity is 20.78%, the return on assets is 12.07% and the return on invested capital is 18.67%, which are all well above the industry benchmarks. I remain positive that Tesla is still ahead when it comes to EVs and self-driving technology. Its AI-based full self-driving technology could disrupt the entire industry, reinforcing my recommendation that Tesla is currently extremely attractively valued and ideal for long-term investors.
