Investment Thesis for Tesla (TSLA)

October 23, 2024

Profile:

Tesla, Inc. designs, develops, manufactures, sells and leases high-performance fully electric vehicles and energy generation and storage systems, and offers services related to its products. The Company's segments include automotive, and energy generation and storage. The automotive segment includes the design, development, manufacturing, sales and leasing of high-performance fully electric vehicles, and sales of automotive regulatory credits. It also includes sales of used vehicles, non-warranty after-sales vehicle services, body shop and parts, paid supercharging, vehicle insurance and retail merchandise. Its consumer vehicles include the Model 3, Y, S, X and Cybertruck. The energy generation and storage segment includes the design, manufacture, installation, sales and leasing of solar energy generation and energy storage products and related services and sales of solar energy systems incentives. Its lithium-ion battery energy storage products include Powerwall and Megapack.

Executive Summary:

Tesla shares closed at $213.65. After analyzing essential growth drivers, including autonomous driving, energy storage, and the expanding EV market globally, I believe tomorrow presents a fantastic entry point for Tesla stock. Catalysts, like the upcoming earnings release (October 24), are likely to exceed market expectations, potentially boosting the stock price. Additionally, the growing likelihood of a 2024 Trump term enhances Tesla’s growth opportunities. His pro-business policies and close relationship with Elon Musk could greatly benefit Tesla, particularly regarding deregulation and energy policies.

Market Overview:

Tesla operates within the electric vehicle (EV) market, expected to grow at a CAGR of 25.4% from 2024 to 2030. While EV adoption is expanding globally, it still represents only a small fraction of the total automotive market, providing Tesla significant room for growth. Tesla continues to outperform both its industry and broader indices:
S&P 500 YTD return: +7.5%
Automobile Manufacturers Index (Dow Jones US Automobiles Index) YTD return: +11.2%
TSLA YTD return: +16.9%
Tesla’s performance over the S&P 500 and its sector index shows strength in the EV and renewable energy market. Tesla’s brand, autonomous driving innovation, and energy integration give it a competitive edge over traditional auto manufacturers who face challenges in transitioning to electric. Tesla’s market cap stands at $812 billion, leading the EV space, with competitors like Rivian and Lucid trailing far behind ($10.5 billion and $6.5 billion, respectively).

Key Growth Drivers:

  • Earnings Report: Tesla’s Q3 2024 earnings report, releasing tomorrow (October 24), is expected to exceed Wall Street estimates. Consensus EPS forecasts are at $0.84 per share, but TSLA could surpass this by a significant margin:
    • Expansion of Gigafactory network, particularly in Mexico and Indonesia, enhances production efficiency and lowers unit costs.
    • Higher-margin products, such as Full Self-Driving (FSD) software and Energy Storage Solutions, could drive a 10-15% beat in gross margins.
    • Recent price reductions in key markets, such as China and the US, have boosted demand, especially in China where Tesla regained market share from BYD.
  • Potential Trump Victory in 2024 US Election: A Trump win in the November election would be impactful for Tesla. While Trump’s first term focused on traditional energy, his pro-business policies favored tax cuts and deregulation. His second term may further benefit Tesla in a post-pandemic economy with economic stimulus and infrastructure spending that could accelerate EV demand. Elon Musk’s visible support for Trump during the election cycle also bodes well for Tesla’s future under his potential leadership.
  • Energy Division as a Future Growth Engine: Tesla’s energy segment, particularly in battery storage and solar technology, represents a multi-billion-dollar opportunity. Tesla’s Energy business grew 35% YoY in Q3, driven by strong demand for Megapack systems as utilities and corporations invest heavily in renewable energy. This division could generate $13 billion in revenue by 2025 with margin expansion as Tesla scales manufacturing.

Rationale and Justification:

Tesla is the largest company across several high-growth sectors: EVs, renewable energy, and autonomous driving. The upcoming earnings report is expected to drive substantial short-term price appreciation. Meanwhile, the macroeconomic conditions and potential Trump policy shifts provide even stronger tailwinds.

Valuation: Tesla’s current forward P/E ratio of 51x is higher than most automakers but is justified by its strong growth trajectory and leadership in transformative industries. With projected EPS growth of 28-30% CAGR over the next five years, Tesla’s valuation remains attractive for long-term investors. The company’s price-to-sales ratio of 9.6x is supported by its industry-leading gross margins of 18% compared to the auto sector average of 8%.

Investment Strategy:

My investment strategy for Tesla focuses on capitalizing on medium-long term price appreciation.

  • Profit Objective: Target a 35 - 40% price increase in the next 4-6 months.
  • Stop-Loss: Implement a stop-loss order at 12% below the purchase price to limit potential losses.
  • Retest: Re-evaluate growth possibilities after the first target is met to identify further opportunities for appreciation.

Note: Retesting is done with all ASP Portfolio Stocks; updates can be found in the inbox on the sidebar.

Risks and Headwinds:

  • Margin Pressure from Price Wars: Tesla’s price cuts to boost demand, especially in China, could pressure margins. While the strategy has increased market share, sustained price reductions might affect profitability, especially as competitors like BYD and NIO follow suit.
  • Geopolitical Risk and Supply Chain Disruptions: Tesla’s supply chain depends on critical raw materials such as lithium and cobalt, which face geopolitical risks, particularly in China and Indonesia. Potential tariffs or trade barriers under a Trump administration could also impact Tesla’s global manufacturing and exports.
  • Autonomous Driving Regulation: Tesla’s Full Self-Driving (FSD) technology rollout faces regulatory uncertainty. While Tesla leads in data and testing, delays in government approvals, especially in Europe and the US, may slow down the monetization of this technology, essential to Tesla’s long-term margin expansion story.

Conclusion:

Tesla is a long-term leader in EVs, renewable energy, and autonomous driving. Although the current macro environment poses risks (and opportunities), the company under Elon Musk, combined with the upcoming earnings and potential benefits from a Trump administration, points to strong growth for TSLA stock. I believe Tesla is well-positioned for sustained growth driven by its competitive advantages and ongoing innovation.