Should You Own Tesla (TSLA)?

Every 18 seconds, another Tesla (TSLA) rolls off a production line somewhere in the world. This relentless pace helped the electric vehicle pioneer recently cross the 7 million vehicle milestone, transforming what critics once dismissed as a Silicon Valley pipe dream into a global clean energy empire that’s reshaping transportation and energy markets.

After watching its stock slide nearly 30% in 2024 amid concerns about slowing demand and price cuts, Tesla silenced critics with knockout Q3 results. 

The company delivered earnings of $0.72 per share on $25.18 billion in revenue, with automotive gross margins expanding to 20.1%. Its energy business hit a record 30.5% margins, proving Tesla can grow profitably even in challenging markets.

Shares popped more than 10%, bringing the stock within striking distance of its all-time high.

Unsurprisingly, it became the top search among financial pros this month across all stocks, according to our TrackStar data.

Yet, demand for EVs remains muted. And Musk’s obsession with robotaxis could derail plans for a cheaper model due out in 2025.

But there may be deeper reasons to own this stock that are worth exploring.

Tesla’s Business

Behind Tesla’s sleek vehicles and viral product launches lies a manufacturing powerhouse spanning three continents. 

The company’s massive gigafactories in California, Texas, Nevada, Shanghai, and Berlin-Brandenburg can churn out over 2.3 million vehicles annually. 

Its charging infrastructure has exploded to match this growth, with more than 6,700 Supercharger stations featuring 62,000+ connectors worldwide – making range anxiety increasingly obsolete.

Tesla segments its business into the following areas:

• Automotive (79% of total revenues) – Drives growth through vehicle sales, regulatory credits, and leasing programs
• Energy Generation and Storage (9% of total revenues) – Powers homes and grids with Powerwall, Megapack, and solar solutions
• Services and Other (12% of total revenues) – Supports customers through maintenance, repairs, merchandising, and the Supercharger network

Tesla plans to launch more affordable vehicles in early 2025, targeting prices below $30,000 after incentives – a move that could dramatically expand its market reach. 

Its artificial intelligence capabilities continue advancing rapidly, with over two billion miles logged using Full Self-Driving technology and a 75% boost in AI training compute capacity just this quarter.

Tesla’s energy division is catching fire too. 

Its Lathrop Megafactory recently produced 200 Megapacks in a single week – enough to store 40 GWh annually. 

A new Shanghai Megafactory will start shipping in early 2025, while Powerwall home battery deployments keep breaking records.

CEO Elon Musk expects vehicle deliveries to surge 20-30% in 2025, fueled by new product launches and expanding production capacity. 

The company is also pushing boundaries with next-generation vehicle platforms and autonomous robotaxis designed without steering wheels or pedals – betting big on a future where cars drive themselves.

Financials

Source: Stock Analysis

Tesla’s breakneck sales pace slowed dramatically in 2023, coming to a full stop in 2024.

Musk cut prices just to keep inventory moving, severely impacting margins.

The latest quarterly report gives hope the company is done with that and instead moving back into growth mode.

Tesla’s $14.5 billion cash flows from operations are roughly the same as in 2022. Yet, CAPEX at $10.9 billion is significantly higher than the $7.2 billion spent in 2022.

At these expanded margins, Tesla could generate close to $25 billion in cash from operations against CAPEX of $11 billion. The company is planning for $8-$10 billion in annual CAPEX in 2025 and 2026.

Right now, Tesla is hoarding $33.6 billion in excess cash on its balance sheet, using the funds to finance its growth.

Valuation

Source: Seeking Alpha

At 71.4x earnings, Tesla is no bargain. Nor at 57.8x operating cash, especially when you compare it to General Motors (GM) or Ford (F), both of which trade at around 3.0x cash flow and 6.0x forward earnings.

Yet, as we’ll see below, none of the other companies, save for Ferrari (RACE) has anything close to Tesla’s growth and profitability.

Growth

Source: Seeking Alpha

Ignoring the YoY revenue growth, the forward growth at 12.5% is still conservative, given Musk’s forecast for 20%-30% delivery growth next year, though it will come with smaller vehicles.

Nonetheless, Tesla’s sales growth has historically delivered numbers other automakers can only dream about.

Profitability

Source: Seeking Alpha

What really sets Tesla apart from its peers is its profitability. 

Tesla’s current ~18% gross margins are the lowest in years. Yet, they are significantly higher than Ford or General Motors. 

Toyota Motors (TM) can deliver similar gross margins. But it can’t get over 20%.

So, if Tesla’s worst performance matches Toyota’s best performance, you can see why investors are hot on Tesla.

Our Opinion 7/10

No other automaker can match Tesla in the EV market. Yet, EVs aren’t as popular as they used to be.

Musk hopes his robotaxis will be available in the near future. Yet, his vision for full self-driving cars without human intervention has yet to be realized.

The launch of a more affordable model in 2025 will boost sales. And we think there is upside beyond the stock’s all-time highs.

But we don’t see the stock doubling without robotaxis becoming a reality or a similar catalyst.