Source: PaxForex Premium Analytics Portal, Fundamental Insight

Once again, the stock market is experiencing a surge, but this time, Tesla isn't leading the charge. Surprisingly, the market is advancing despite the downturn in the electric vehicle (EV) giant.

As of the latest data, Tesla shares have plummeted by a staggering 34% year to date (YTD), while the Nasdaq-100 index continues its upward trajectory. Currently, the stock sits 60% below its all-time highs, contrasting sharply with the broader market's proximity to record levels.

We find ourselves at a pivotal juncture with Tesla stock. Bulls argue that this presents an ideal buying opportunity, given the company's preparations for its next phase of expansion. Conversely, bears contend that the company is finally moving towards a more realistic valuation befitting a manufacturing-based enterprise.

Which viewpoint holds sway? And where will Tesla stock stand three years from now?

In 2023, Tesla's expansion in unit volumes persisted, with the company delivering 1.8 million cars worldwide, a significant increase from 1.3 million in 2022 and 936,000 in 2021. This remarkable growth solidifies Tesla's position as a leading manufacturer, not only in electric vehicles but across the automotive industry. For context, Toyota, the largest automaker globally, produces just over 10 million cars annually.

However, this growth in unit volumes has come at the cost of price reductions. Tesla's product lineup has shifted towards more affordable options like the Model 3 and Y, compared to its older X and S models. Furthermore, Tesla has opted, perhaps out of necessity, to slash prices on the Model 3 and Y to drive up sales. Evidence of this strategy is reflected in the plummeting prices of used Teslas, which have halved since their peak in early 2022.

The downward trend in prices has resulted in decelerating revenue growth and diminished margins. Despite a 19% increase in revenue to $97 billion in 2023, growth slowed to a mere 3% in the fourth quarter. Gross margins declined from 25.6% in 2022 to 18.2% in 2023, contributing to a 35% decrease in operating income for the year. This erosion of margins underscores Tesla's pursuit of broader global reach, albeit at the expense of profitability.

To further expand its reach, Tesla will likely introduce an even more affordable vehicle in the near future. While the company has been dropping prices for the Model 3 and Y worldwide, there's a limit to how many vehicles it can sell in the $40,000-and-above price bracket, given the relatively limited number of people who can afford premium-priced EVs.

In pursuit of a broader customer base, Tesla aims to launch a new, cheaper vehicle, rumored to debut around 2025 according to CEO Elon Musk's recent earnings call. However, it's worth noting that Musk's timelines are often subject to change, and the arrival of the new product by 2025 isn't guaranteed. Nonetheless, it's reasonable to anticipate a new product within the next few years.

Introducing a more affordable vehicle could significantly boost Tesla's sales volumes. However, if this new vehicle is priced around $25,000, revenue growth may lag behind unit volume growth as the average selling price of Teslas decreases. Investors should consider this when estimating Tesla's revenue potential in the coming years.

Successful investors recognize that current earnings aren't as crucial as future earnings. Therefore, when projecting Tesla's trajectory, we must estimate its financial performance in the coming years. Let's assume Tesla triples its sales volumes compared to 2023 within three years, mainly due to the launch of its more affordable vehicle. With tripled volumes, revenue could double, even with lower average selling prices.

Assuming Tesla maintains a similar profit margin to 2023 at 9.2%, it may lose margin due to lower selling prices but could compensate with economies of scale. For reference, Toyota maintains similar operating margins. Doubling Tesla's 2023 revenue to $194 billion and applying a 9.2% profit margin suggests Tesla could earn $17.8 billion in three years.

Presently, Tesla boasts a market capitalization of $512 billion. Dividing this by $17.8 billion yields a price-to-earnings ratio (P/E) of 29, slightly above the market average. This suggests that Tesla's stock might not see significant growth over the next few years, even after recent declines, potentially representing a value trap for investors.

Investors considering buying during the dip should have a more optimistic outlook on the company's future growth. Otherwise, Tesla's stock might stagnate.

As long as the price is above 160.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 172.92
• Take Profit 1: 200.00
• Take Profit 2: 220.00

Alternative scenario:

If the level of 160.00 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 160.00
• Take Profit 1: 140.00
• Take Profit 2: 120.00