What will happen to Tesla Stock in three years?
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The overall stock market is up again, but $Tesla Motors(TSLA)$ isn't leading the way this time. As of this writing, Tesla's shares are down 34% this year, while the $NASDAQ 100(NDX)$ continues to rise. Tesla's price is now 60% off its all-time high, while the broader market is close to its own.
Tesla's stock is at another crossroads.
Bulls would say it's a great buying opportunity, with the company gearing up for its next growth spurt.
Bears, on the other hand, think the company's finally settling into a normal valuation.
But which view is right? What's the future of Tesla's stock in three years?
Sales are up, profits are down
In 2023, Tesla continued to grow its sales, delivering 1.8 million cars to customers worldwide, up from 1.3 million in 2022 and 936,000 in 2021. That makes Tesla not just a major EV manufacturer, but a major carmaker overall. For reference, $Toyota(TM)$ , the world's largest carmaker, barely tops 10 million vehicles a year.
But to achieve that sales growth, Tesla had to slash prices. The lower prices led to slower revenue growth and narrowing margins. In 2023, Tesla's revenue grew 19% to $97 billion, but that slowed to just 3% in the fourth quarter. Gross margins fell from 25.6% in 2022 to 18.2% in 2023, with operating income down 35% for the year. As Tesla expands globally, its margins are getting uglier.
Will a new car save the day?
To get more customers, Tesla might need to roll out a more affordable model. Even with constant price cuts for the Model 3 and Y, there's only so many cars you can sell. After all, not everyone on this planet has the cash for a pricey EV.
To broaden its potential customer base, Tesla plans to launch cheaper models in the next few years. Rumor has it that something could hit the market around 2025. But that's no guarantee the new ride will see the light of day in 2025. Sure, a new car could help Tesla boost sales. But if the new model comes in at around $25,000, Tesla's revenue growth will lag behind sales growth as the average selling price of its cars continues to drop.
The stock's still not cheap
Investors know it's not about what a stock's earning now, it's about what it'll earn in a few years. When we look ahead at Tesla's stock trajectory, we need to estimate its financial path.
Let's say Tesla's margins stay flat at 2023's 9.2%. Tesla will lose some profit from lower prices, but it should make up for it with economies of scale. Double Tesla's 2023 revenue to $194 billion, plus a 9.2 percent margin, and Tesla would make $17.8 billion in three years.
Currently, Tesla's market value is $512 billion. Divide that by $17.8 billion, and the P/E ratio is 29, slightly above the market average. If you want to buy the dips, you have to be more optimistic about Tesla's future growth. Otherwise, Tesla stock will continue to struggle.
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