2022 was a challenging year for stock market investors — especially those who put money in the tech-heavy Nasdaq Composite index, which is down a whopping 11% over the last year. While Tesla’s (NASDAQ: TSLA) stock has hit the ground running in 2023, it is still underperforming the index, with its price down 32% over the same time period.
While there is still potential for black swan events or unexpected news to derail financial markets, a combination of falling inflation and robust economic data could mean the beginning of a new bull run in equities. Let’s discuss why Tesla could make a great way to bet on it.
Follow the megatrends
If you could go back in time to the decade from 2000 to 2010, would you invest in e-commerce or brick-and-mortar retail? For most people, the answer is e-commerce. Megatrends can generate epic returns, even if not every company makes it to the finish line. The electric vehicle (EV) industry may be in a similar situation to the one e-commerce was in two decades ago.
Analysts at Statista expect the global EV industry to expand at a compound annual growth rate (CAGR) of 17% to $858 million by 2027 as government incentives and technological improvements drive growth.
With a market share of 13.8%, Tesla is the industry leader (second to BYD, which commands an 8.8% share). And unlike traditional automakers such as Ford Motor Company or General Motors, it won’t have to cannibalize an existing gas-powered lineup to expand its business. Tesla’s stellar operational performance represents another long-term edge — especially compared to less mature pure-play rivals, such as Rivian Automotive or Lucid Group.
Tesla can win the price wars
At the start of the year, many industry observers feared that rising competition in the EV industry could be a near-term risk for Tesla. These concerns mounted after the automaker cut its vehicle prices by an average of 20% globally to help support demand. But instead of just a headwind, price wars can become an opportunity for Tesla to outcompete its less profitable rivals and protect its long-term market share.
In 2022, Tesla generated an operating income of $13.7 billion. This trounces other pure-play EV makers like Rivian, for example, which lost a whopping $6.86 billion in the period. As a profitable company, Tesla can keep its products cheaper for longer to starve out the competition.
If less-well-capitalized rivals try to compete with Tesla based on price, they could see their losses balloon out of control. This elephant in the room may be part of the reason Tesla CEO Elon Musk believes both Lucid and Rivian are “in deep trouble” unless they find a way to reduce their cash burn.
Fantastic long-term guidance and a reasonable valuation
Tesla is hugely optimistic about the future. Management expects to be able to grow production at a CAGR of 50% over the long term. And at the company’s 2023 investor day, it teased new products such as the Cybertruck, which is expected to launch later this year.
Most importantly, Tesla believes manufacturing improvements could lead to a stunning 50% reduction in its production costs for its next generation of vehicles. While this is undoubtedly a tall order, even partial success would compound the company’s existing advantages in profitability and further solidify its long-term market share. The stock looks like a buy.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD and Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.