Tesla's Potential for Long-Term Success.

Tesla's stock has been on a year-to-date rally, with a 73% increase in 2023. However, despite this growth, the company's stock price is still significantly lower than its all-time high of 410 achieved in late 2021. The current economic climate, characterized by high levels of inflation and interest rates, is making it challenging for the auto industry to thrive. Nevertheless, Tesla's scale and profitability suggest that the company has the potential to rebound even stronger than before, and there are several reasons why this could be the case.

One of the main reasons for Tesla's potential success is the electric vehicle (EV) market's growth. According to Goldman Sachs analysts, the EV market is expected to make up a significant 61% of global car sales by 2040, with the figures rising to over 80% in the US and Europe. This presents a great opportunity for Tesla to dominate the industry, and the company is taking measures to stay ahead of its competitors. In April, Tesla implemented broad-based price cuts for its Model 3 and Model Y in Asian and European markets, following a 20% global price reduction at the beginning of the year. While some investors view the discounts as a sign of desperation, they may be part of Tesla's strategy to increase its market share in the long run, given the high level of competition. The company's rivals such as Rivian and Lucid are reportedly losing money, and the price wars are expected to protect Tesla's lead. Tesla's management has a target to cut prices on next-generation cars by 50% by unlocking manufacturing efficiencies. Thus, the battle for dominance in the industry is just beginning.

Another factor contributing to Tesla's potential success is its energy business. During Tesla's 2023 investor day, the company's management shared a vision of expanding beyond the automobile sector. The presentation outlined ambitious goals such as eliminating fossil fuels from the power grid, electrifying non-conventional vehicles, and developing more efficient energy storage and transfer systems. However, these plans are more than just words for Tesla. In Q4, Tesla's energy generation and storage business reported a staggering 90% increase in revenue to $1.3 billion, surpassing the 35% growth rate of its automotive sales. Orders for Tesla's Powerwalls and Megapacks, which store solar energy for homes and reduce businesses' dependence on the grid, are soaring. Tesla's management anticipates continued strong demand and is increasing production at its dedicated battery-pack factory in California. While energy currently represents a small fraction of Tesla's business, its impressive growth rate suggests that it could become a major revenue source and diversification strategy for the company in the long run.

Finally, Tesla's valuation appears to be fair, which is good news for investors. Historically, investors in the stock market have had to choose between a company's quality and its valuation. For Tesla, this decision was difficult, as its exceptional fundamentals were often overshadowed by its previously exorbitant stock price. In late 2020, the company's market capitalization surpassed that of the five largest automakers combined, and its price-to-earnings ratio reached an astronomical 1,120. However, Tesla's days of being overvalued appear to be behind it. Despite its P/E ratio of 48 being more than double the Nasdaq Composite's average, it seems reasonable considering Tesla's rapid growth rate and strong economic position against its competitors. Long-term investors still have an opportunity to invest in Tesla's continued success.