While the stock market is witnessing a surge, the same cannot be said for Tesla (NASDAQ: TSLA). Despite the overall market positivity, Tesla shares have taken a beating this year, plummeting by a significant 34% year to date (YTD) as of now. It’s a stark contrast to the flourishing Nasdaq-100, with Tesla now trailing behind by 60% from its all-time highs while the broader market is scaling new peaks.
This situation puts Tesla stock at another critical juncture. Optimists claim it’s an ideal moment to buy in as the company gears up for its next growth spurt. On the flip side, skeptics argue that Tesla is finally moving towards a more realistic valuation fit for a traditional manufacturing-centric business. The big question looms: Where will Tesla stock stand in three years?
TSLA Total Return Level data by YCharts
The Road Ahead for Tesla: More Volume, Lower Margins
Despite the challenging times, Tesla kept its growth momentum going in 2023. The company managed to deliver 1.8 million vehicles globally, a notable climb from 1.3 million in 2022 and 936,000 in 2021. This impressive scaling up solidifies Tesla’s reputation not just as an electric vehicle (EV) giant but also as a significant player in the automotive industry overall. To provide context, the world’s largest automaker, Toyota, produces just over 10 million cars annually.
However, this growth came at a cost. To drive up volumes, Tesla had to slash prices, focusing more on its affordable Model 3 and Y offerings over its older X and S models. The decision to cut prices on the Model 3 and Y further impacted the company, as reflected in the substantial drop in the prices of used Teslas since early 2022. The declining prices resulted in slower revenue growth and shrinking margins. In 2023, Tesla observed a 19% revenue increase to $97 billion, but by the fourth quarter, the growth had dwindled to a mere 3%. The gross margins also dipped from 25.6% in 2022 to 18.2% in 2023, leading to a 35% fall in operating income for the year as Tesla sought to expand its global footprint.
Revival Strategy: Can Offering a New Vehicle Save the Day for Tesla?
To tap into a broader market segment, Tesla is likely to introduce a more affordable vehicle soon. The existing lineup, with prices starting at $40,000 and above, has its limitations in terms of customer reach. Anticipated for a 2025 rollout, this new budget-friendly model aims to attract a wider consumer base. While CEO Elon Musk’s timelines are known for flexibility, signs point to a new product launch in the pipeline in the coming years.
While a new vehicle can potentially drive up volumes, if it enters the market at a lower price point of around $25,000, Tesla may face challenges in revenue growth as the average selling price of its vehicles continues to decline. Investors must consider this factor when projecting Tesla’s revenue potential in the near future.
TSLA Operating Margin (TTM) data by YCharts
The Valuation Conundrum: Is Tesla Stock Truly a Bargain?
Looking beyond the present earnings and focusing on the future trajectory is essential for insightful investors. Assuming Tesla can triple its volumes by 2026, courtesy of a successful budget vehicle launch, revenue could double due to declining average selling prices. Keeping profit margins at a comparable level to 2023 (9.2%), Tesla could potentially rake in $17.8 billion in profits in three years.
At the current market cap of $512 billion, this translates to a price-to-earnings ratio (P/E) of 29 based on the projected earnings. The slightly elevated P/E ratio suggests that Tesla might stagnate in the upcoming years. Despite recent setbacks, the stock isn’t a steal and could pose a risk for investors unless there’s a strong belief in Tesla’s future growth.
Investors eyeing the dip must hold a bullish outlook on Tesla’s prospective expansion. Otherwise, the stock might remain at a standstill, leaving investors in choppy waters.
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Brett Schafer holds no position in the aforementioned stocks. The Motley Fool has positions in and endorses Tesla. The Motley Fool upholds a disclosure policy.
The perspectives and viewpoints expressed here represent the author’s opinions and do not necessarily align with those of Nasdaq, Inc.
