Source: PaxForex Premium Analytics Portal, Fundamental Insight
Over the past five years, Tesla has been on an incredible trajectory. The company's shares in the electric vehicle (EV) sector have skyrocketed by a remarkable 1,263%, far surpassing the S&P 500's modest 54% return during the same period. While Tesla currently faces immediate challenges due to intensifying competition and industry price battles, its future prospects may shine even brighter than its past achievements. Let's delve deeper into what the next five years could hold for this pioneering company.
Competition within the EV industry has been steadily increasing as both startups and established automotive giants vie for a slice of the rapidly expanding market. For Tesla, this heightened competition has resulted in price wars and a squeeze on profit margins. In the second quarter, the company's operating margin declined from 14.6% to 9.6% as it reduced prices across its entire vehicle lineup.
In the short term, these challenges pose headwinds for Tesla's stock because lower margins can translate into reduced profits, even if revenue continues to grow. However, long-term investors should keep their focus on the bigger picture.
Analysts at Goldman Sachs project that EVs will constitute half of all global new car sales by 2035, with this percentage soaring to over 85% in the United States and the European Union. As of 2022, EVs account for just 14% of worldwide new car sales, indicating that the industry is still in its early stages. Therefore, it makes strategic sense for Tesla to prioritize expanding its long-term market share, even if it means sacrificing short-term profits. Tesla's significant scale and profitability will also enable it to outperform competitors that are currently operating at a loss, such as Rivian or Lucid.
Tesla's management has outlined plans to halve prices on next-generation vehicles through technological advancements and manufacturing efficiencies. If successful, these endeavors could create room for further price reductions while safeguarding Tesla's profit margins.
During Tesla's Investor Day presentation in 2023, the company's leadership unveiled an ambitious vision that extends beyond being just an automotive manufacturer, aiming to diversify into various clean and renewable energy endeavors. Over the upcoming five years, one of the most promising non-automotive business segments for Tesla could be energy storage and generation. This sector involves the sale and installation of solar panels and stationary batteries for residential and commercial customers.
In the second quarter, Tesla's energy division raked in $1.5 billion in sales, accounting for approximately 6% of its total revenue. However, what's truly striking is its year-over-year growth rate of 74%, outpacing the growth rates of the automotive and services segments, which stood at 46% and 47%, respectively. This rapid expansion suggests that over the long term, energy may play a more substantial role in Tesla's revenue makeup, bolstering top-line growth and providing essential diversification.
Tesla's management is committing substantial investments to seize this opportunity by expanding its production infrastructure. In April, the company unveiled plans for its second "megafactory" in Shanghai, China, with the capacity to produce 10,000 storage batteries annually. This strategic move could help reduce costs and make Tesla's energy products more widely available.
While Tesla's stock currently carries a forward price-to-earnings (P/E) multiple of 62, which might seem steep, particularly considering the short-term challenges posed by industry competition and price wars, investors with a long-term perspective should take note of the company's remarkable growth trajectory and its well-defined strategy to dominate the mass market for electric vehicles in the coming five years and beyond.
Despite its nearly $900 billion market capitalization, Tesla remains a quintessential growth stock that has not yet reached its full potential, especially as new business verticals like energy storage gain momentum. In the stock market, one often gets what they pay for, and companies with the most promising prospects typically command a corresponding premium. Tesla exemplifies this principle, consistently demonstrating its capacity for innovation and growth in the ever-evolving electric vehicle and clean energy landscape.
As long as the price is above 215.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 244.21
- Take Profit 1: 275.00
- Take Profit 2: 299.00
Alternative scenario:
If the 215.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 215.00
- Take Profit 1: 197.00
- Take Profit 2: 179.00
