Over the last five years, Telsa (TSLA -0.64%) has been on a tear. Shares in the electric vehicle (EV) giant have grown by a jaw-dropping 1,263%, dwarfing the S&P 500's return of just 54% over the same period. While the automaker faces near-term challenges from rising competition and an industry price war, its future might be even brighter than its past. Let's dig deeper into what the next five years could look like.
Tesla could eventually win the price wars
Competition in the EV industry is rising as start-ups compete with established automotive brands to capitalize on the fast-growing opportunity. For Tesla, this has led to price wars and margin pressures. In the second quarter, the company's operating margin fell from 14.6% to 9.6% as management slashed prices across its vehicle lineup.
In the near term, this is a headwind for Tesla's stock because lower margins can mean lower profits, even if revenue keeps growing. But long-term investors should remember the big picture.
Analysts at Goldman Sachs expect EVs to make up half of global new car sales by 2035 -- with the percentage rising above 85% in the U.S. and European Union. As of 2022, EVs represent just 14% of global new car sales, so the industry is still relatively young. It makes sense for Tesla to sacrifice near-term profits to maximize long-term market share. The company's scale and profitability will also help it outcompete loss-making rivals like Rivian or Lucid, possibly driving them out of business.
Tesla's management plans to cut prices on next-generation vehicles by half through technological improvements and manufacturing efficiencies. If successful, these efforts could free up room for more price cuts while protecting Tesla's margins.
Energy storage could become a key growth driver
In Tesla's 2023 Investor Day presentation, management highlighted a vision of becoming more than just a car company -- expanding into more forms of clean and renewable energy. Over the next five years, the most promising non-automotive business vertical might be energy storage and generation. This segment involves selling and installing solar panels, and stationary batteries for residential and commercial clients.
In the second quarter, Tesla's energy segment generated $1.5 billion in sales -- around 6% of total revenue. But with a year-over-year growth rate of 74%, the business is expanding faster than automotive and services, which grew at rates of 46% and 47%, respectively.
Image source: Getty Images.
Over the long term, energy may become a larger percentage of Tesla's revenue, supporting top-line growth and giving it much-needed diversification. Management is investing heavily in the opportunity by building out production infrastructure. In April, the company announced plans for its second "megafactory" in Shanghai, China designed to produce 10,000 storage batteries annually. The project could help lower costs and increase the availability of Tesla's energy products.
Is it too late to buy the stock?
With a forward price-to-earnings (P/E) multiple of 62, Tesla's stock is far from cheap, especially considering the near-term pressure it could face from price wars as industry competition heats up. That said, investors with a long-term time horizon should focus on the electric automaker's tremendous growth rate and convincing strategy to dominate the EV mass market over the next five years and beyond.
Despite its almost $900 billion market cap, Tesla is still a quintessential growth stock that is far from reaching its full potential, especially as new business verticals like energy storage pick up speed. You get what you pay for in the stock market. And often, the companies with the best prospects trade for a corresponding premium. Tesla is no exception.
