Despite a 73% year-to-date rally in 2023, Tesla (TSLA -0.05%) stock is still down substantially from its all-time high of $410, reached in late 2021. With inflation and interest rates elevated, this is a challenging time for the auto industry. But Tesla's scale and profitability should help it bounce back stronger than ever. Let's dig deeper.
1. Tesla is poised to win the price wars
Analysts at Goldman Sachs expect the electric-vehicle (EV) market to represent a whopping 61% of global car sales by 2040 (that figure jumps to above 80% in the U.S and Europe). For Tesla, this megatrend is an opportunity to take over the industry. And it's taking the appropriate steps to make sure it stays ahead of the competition.
In April, the company embarked on wide-ranging global price cuts, discounting its Model 3 and Model Y in European and Asian markets. This follows a decision to cut prices by around 20% globally at the start of 2023. While some investors look at the discount as a sign of desperation, it may be part of Tesla's strategy to maximize its long-term market share during this period of high competition.
Many of the company's rivals (such as Rivian or Lucid) are losing money, and the price wars will help ensure they don't threaten Tesla's lead. Tesla's management aims to halve prices on next-generation cars by unlocking manufacturing efficiencies. So the battle is just getting started.
2. Keep an eye on the energy business
On Tesla's 2023 investor day, management highlighted a vision of becoming more than just a car company. Much of the presentation focused on lofty goals like eliminating fossil fuels from the electricity grid, electrifying non-traditional vehicles, and developing more efficient storage and transfer systems. But for Tesla, this is more than just talk.
Image source: Getty Images.
In the fourth quarter, the company's energy generation and storage business saw revenue soar 90% to $1.3 billion, dwarfing the 35% growth rate in automotive sales. Orders are surging for Tesla Powerwalls and Megapacks, which are designed to store solar energy for households and reduce businesses' reliance on the electricity grid.
Management expects demand to stay strong, so it's ramping up production at Tesla's dedicated battery-pack factory in California. While energy is still a tiny part of Tesla's business, the segment is rapidly gaining ground. Its stellar growth rate means it could become a major source of revenue and diversification for the company over the long term.
3. The valuation is finally reasonable
Stock market investors must usually make a trade-off between company quality and valuation. For Tesla, this has historically been a difficult choice because its previously outrageous stock price has often overshadowed its excellent fundamentals. In late 2020, the company's price-to-earnings ratio soared as high as 1,120, while its market capitalization exceeded the value of the five next largest automakers combined.
The good news is that Tesla's era of overvaluation seems to be over. While the stock's P/E of 48 is more than double the Nasdaq Composite's average, this looks reasonable, considering its rapid growth rate and strong economic moat against competition in its industry. Long-term investors still have the opportunity to bet on Tesla's continued success.
