Electric cars accounted for nearly 9% of total car sales last year, according to the International Energy Agency. That figure has more than tripled since 2019, and a report from Grand View Research suggests sales will grow 38% a year through 2027, driven by falling manufacturing costs and extended battery range.
Not surprisingly, the market has become highly competitive. Legacy automakers are investing billions to electrify their vehicles, and dozens of start-ups are pouring into the market. But Tesla (TSLA -0.27%† is still my biggest stock of electric cars to buy and hold.
This is why.
Tesla is the leader in electric cars
Tesla’s focus on production efficiency continued to pay off in the first quarter. Despite supply chain disruptions and rising costs, the company posted an operating margin of 19.2%. That’s up from a leading operating margin of 14.7% in the fourth quarter.
Several factors drive that efficiency, but battery costs are high. Tesla pays 10% less to build battery packs than its next closest competitor, and it pays 24% less than the industry average, according to Cairn ERA. Battery packs are the most expensive part of an electric car, meaning Tesla has a significant cost advantage, and Cairn says that lead will last (at least) until the end of the decade.
Highly automated factories, rising auto production and pricing power have also contributed to Tesla’s efficiency, and those factors have translated into strong financial results. Over the past year, sales rose 73% to $62.2 billion and free cash flow shot up 188% to $6.9 billion.
Looking ahead, Tesla’s electric car business should benefit from several catalysts. That includes launching the Cybertruck in 2023 and ramping up production of other vehicles at the new Gigafactories in Berlin, Germany; and Austin, Texas. The Berlin plant is particularly noteworthy, as it will reduce logistics costs by locating Tesla’s operations in Europe.
Here’s the big picture: Tesla captured a leading market share of 14.4% in electric car sales last year. Yes, that figure is falling. But the company’s operating margin is evidence of a cost advantage, and new technologies like the 4680 battery cell should bolster that lead. Better yet, Tesla’s ability to innovate should take it into more profitable vertical markets in the future.
Tesla also wants to be a leader in robotic axis
Tesla’s goal to build a self-driving car is no secret, nor is its plan to launch an autonomous ride-hailing service. As of 2016, the autopilot hardware includes eight remote cameras that crowdsource driving data to train neural networks, the artificial intelligence engines that power the entire self-driving (FSD) software. In 2019, it debuted a custom semiconductor designed to run the FSD software in its cars. And in the latest earnings call, CEO Elon Musk reiterated his belief that the FSD platform would surpass the capabilities of a human driver by the end of the year.
In addition, Musk announced plans to build a special robotic axi. The vehicle will be optimized for autonomy and low-cost transportation, and Tesla expects to reach volume production by 2024. The robotic axi brings the company one step closer to an autonomous ride-hailing service. That’s especially important, as management expects FSD to ultimately be the primary source of profitability for Tesla’s electric car business.
Asset manager Ark Invest agrees, theorizing that autonomous ride-hailing platforms could generate $2 trillion in annual profits by 2030. That puts Tesla in front of another major market opportunity.
Tesla is investigating autonomous robots
Tesla plans to extend its artificial intelligence expertise to autonomous robots. Last year, the company introduced Optimus, an intelligent humanoid bot intended to perform dangerous or boring tasks instead of humans, and Tesla may have a prototype as early as this year.
Optimus is of course still very theoretical at the moment, but it could be a game-changer for Tesla in ten years. During the latest earnings call, Musk even said, “Optimus will eventually be worth more than the auto trade, worth more than FSD.”
What about the valuation?
Tesla is undoubtedly one of the more controversial stocks on the market. Right now, the company is worth more than the next 14 automakers combined, and its price-to-sale ratio of 19 is more like a software company’s valuation than an automaker’s. Understandably, some investors cannot fathom that figure and see the stock as dangerously overvalued.
Of course some analysts called Apple overvalued when it was a $60 billion company in 2006, a year before it released the first iPhone. The company has since grown into a $2.6 trillion empire. likewise, Fortune magazine published an article in 2010 which stated: “Amazon trades at a valuation that far exceeds any appearance of reality.” Amazon was worth $76 billion at the time, a fraction of its current valuation of $1.4 trillion.
That doesn’t mean Tesla stock is cheap right now. It could be wildly overrated. But there are always two sides to every story. I think Tesla will leverage its technology expertise for a strong foothold in more profitable industries. That’s why it’s my biggest stock of electric cars to buy and hold.
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