Investing in companies that are rapidly growing sales can be a formula for success in the stock market. Powerful revenue growth demonstrates that there's a solid demand for a company's products, and that often precedes robust earnings growth. However, even with sales growth, neither eventual profits nor increasing profits are sure things.
Companies with briskly growing sales are a dime a dozen, but many of them are quite small and young. A more-established company that's putting the pedal to the metal on revenue growth is electric-vehicle specialist Tesla Inc. (NASDAQ:TSLA), which also makes solar panels and energy-storage products.
Tesla's soaring revenue and its sources
Revenue growth hit the fast track soon after the company, led by co-founder and CEO Elon Musk, went public in 2009.
In 2012, Tesla began delivering its luxurious, high-performance Model S sedan, which was an immediate success and garnered numerous industry honors. In late 2015, deliveries began of the similarly lauded high-end Model X crossover vehicle. Also that year, Tesla launched its stationary energy-storage products. And last year, a third revenue stream kicked in when Tesla acquired one of Musk's other companies, SolarCity, which makes solar panels that can be coupled with Tesla's energy-storage products.
A potentially huge boost to Tesla's revenue is coming soon: Deliveries of the company's first mass-market electric vehicle are anticipated to begin this month. Initial demand for the Model 3, which gets 215 miles per charge and has a starting price of $35,000 before applicable tax credits, proved stronger than Tesla was expecting: Within a month and a half of the car's unveiling last March, 373,000 people had plunked down $1,000 apiece to reserve a vehicle. (A current number of reservations isn't available.) Robust demand bodes well not only for Tesla, but also for the companies that supply lithium to make the lithium-ion batteries that power EVs.
Like all Teslas produced since October 2016, the Model 3 will be equipped with all the hardware needed for full self-driving capability, priming the company to be a first mover in driverless cars once they're legal across the land.
Where the rubber meets the road
Wall Street expects Tesla's year-over-year revenue to increase nearly 65% to $11.53 billion this year followed by a nearly 71% jump to $19.67 billion in 2018 -- this equates to revenue growth of 181%, or a near tripling, over two years. This year's revenue is getting a big boost from November's SolarCity acquisition, and should also get a major lift from Model 3 sales, though how big that lift will be depends upon when deliveries start. Expect Model 3 sales to be 2018's most powerful growth engine.
Still, Wall Street analysts project that Tesla will remain unprofitable on a trailing-12-month GAAP basis five years from now. While this is just a projection, it's safe to say that profitability doesn't look likely in the near term. While Tesla has never been profitable on a TTM GAAP basis, it's worth noting that it posted a profit of $0.14 per share in 2016's third quarter and also a small profit in Q1 2013. So, there's a good case to be made that the company's auto business, at least, has the potential to get into the black.
Stock prices are ultimately driven by profit growth, so in order for Tesla to turn out to be a good investment over the long haul, it's going to eventually have to be profitable. "Eventually" could be a very long time -- it all depends on how much of a leash investors decide to give Musk. Investing in Tesla is essentially investing in Musk -- you need to believe that he has a path to profitability in mind, and won't endlessly keep pouring all of its revenue -- and then some -- back into the business.