Tesla: Thriving Amidst Challenges with Promising Growth Ahead

Tesla(NASDAQ: TSLA) has consistently posed a distinctive challenge for investors.

Though known as an automaker, Tesla’s valuation diverges from traditional metrics. The company has been a prominent player in the electric vehicle (EV) market, which previously saw significant growth. However, in the past year, growth in the EV sector has slowed, affected by rising supply and concerns about the value of these high-priced vehicles.

As its main market reaches maturity, Tesla is shifting focus toward autonomy and artificial intelligence (AI), areas that CEO Elon Musk believes will define the company’s future.

In recent quarters, Tesla indicated that it is transitioning between two major growth phases. The global expansion of the Model 3 and Y is nearing completion, while the company anticipates advancements in autonomy and the launch of new models.

During Tesla’s third-quarter earnings call on Wednesday, Musk emphasized his belief that the company could reach unprecedented levels if it successfully implements autonomous technology: “If we execute on our objectives — I think we will — my prediction is Tesla will become the most valuable company in the world, and probably by a long shot.”

This declaration adds to Musk’s history of bold forecasts. The encouraging news for investors is that Tesla’s third-quarter report exceeded their expectations, showing solid profit growth and improving margins. As of 10:25 a.m. ET, the stock surged by 16%. Continue reading for more insights.

Image source: Tesla.

Third-Quarter Success for Tesla

Despite an increase in deliveries for the third quarter, Tesla’s automotive revenue growth remained moderate, rising just 2% to reach $20 billion. Excluding regulatory credits, revenue growth was even lower. Total revenue, which also includes rapidly growing segments like energy generation and services, increased by 8% to $25.2 billion – slightly missing analyst estimates of $25.37 billion.

According to generally accepted accounting principles (GAAP), gross margin improved from 17.9% to 19.8%. This positive change followed achieving the lowest production cost per vehicle of $35,100, aided by expense reductions from layoffs in the previous quarter.

Operating income surged by 54% to $2.7 billion, while adjusted (non-GAAP) earnings per share rose from $0.66 to $0.72, exceeding estimates of $0.58. Notably, the Cybertruck also generated a gross profit for the first time.

Amid discussions of profit growth, investors also sought clarity on production expansion. Tesla appears on track for flat growth this year, but Musk revealed during the earnings call that the company aims for 20% to 30% production growth next year, starting with the Cybercab introduced at a recent event.

Musk anticipates that the two-seater autonomous vehicle, which lacks a steering wheel or pedals, will debut on Texas roads next year, with California likely to follow.

Exploring Autonomy

Musk continues to emphasize the potential of autonomous technology, with supporters like Ark Invest’s Cathie Wood suggesting it could elevate Tesla’s valuation to $5 trillion. He envisions Tesla’s robotaxi network radically transforming local and long-distance transportation while lowering costs. Additionally, he believes that owners of Cybercabs could generate income by renting their vehicles.

Tesla claims a unique position in its ability to manufacture autonomous vehicles on a large scale, ready to activate full autonomy once the technology is ready. Despite this, the timeline for full self-driving remains uncertain.

We might gain a clearer understanding as the Cybercab begins its road test. Yet, investors have learned to approach Musk’s timelines with caution. Vehicles must comply with regulatory standards and demonstrate reliability in real-world conditions, as demonstrated by Alphabet’s Waymo.

Investing in Tesla: What to Consider

If Tesla can deliver on its ambitions in autonomy for both vehicles and robotics, significant upside potential exists for the company.

However, it’s important to recognize that the explosive growth days of the EV market seem to be largely behind us. The Tesla stock reaction to recent earnings showed investor relief at improving margins, which was a pleasant surprise. Even with a potential 20% to 30% growth target, this still falls short of Musk’s earlier 50% target set in 2021.

Should Tesla realize Musk’s vision for a vast autonomous vehicle network, the stock may prove to be a worthwhile investment. Without that advancement, it risks disappointing investors. Following the stock’s recent surge, it now trades at over 100 times adjusted EPS, reflecting the market’s view of Tesla as more than just an automaker.

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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Jeremy Bowman does not hold positions in the mentioned stocks. The Motley Fool has stakes in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.