Tesla (TSLA -1.10%) is now the most valuable automaker in the world by a wide margin, despite the fact that many manufacturers make in just a few weeks the number of cars it sells in a whole year. Investors are betting that its disruption of the auto industry will continue for at least the next five years, and likely much longer.
Looking into my crystal ball, here's where I expect to see Tesla five years from now.
Auto production will continue to boom
In 2020, Tesla expects to deliver more than 500,000 vehicles, up 36% from 2019. That's a hefty growth rate, and if we assume a 30% production growth rate annually, by 2025, the company would be making 1.86 million vehicles. Given the expected ramp-up of production from its factory in China and the one it's trying to break ground on in Germany, it may be possible for Tesla to produce nearly 2 million vehicles by then.
The risk for Tesla is that other automakers may catch to it up in electric vehicle designs. This year could be a turning point year: Audi, Rivian, Volvo, Ford, and others are launching new electric vehicle models with longer ranges and increasingly competitive prices. If these vehicles begin to cut into Tesla's leading EV market share, it could take a bite out of demand and ultimately growth. It hasn't become a problem yet, but in the next five years, Tesla's competitive advantage will likely start to diminish.
A crossroads for Autopilot
Tesla is far from the only company working on self-driving cars, it's just been the most aggressive about bringing autonomous features to consumers. But the company's Autopilot system is a long way from full autonomy, and research firm Navigant rates Tesla behind GM Cruise, Alphabet's Waymo, Ford, Volkswagen, and even Uber in the autonomous vehicle race.
CEO Elon Musk said on fourth-quarter 2019 earnings call that Tesla is still at best months away from a fully self-driving vehicle. Meanwhile, cars from Cruise, Waymo, and others are logging millions of self-driving miles every year. When they launch products into the market they may leapfrog Tesla's autonomous driving technology.
Further, the competition may be able to reach scale faster than most investors think. Technology companies such as NVIDIA and Intel that sell autonomous technology as a service to multiple manufacturers could spread autonomy far faster than Tesla can. We can't know where that leaves Autopilot, but I think the technology will come to a crossroads within the next five years, and where it goes from there may leave Tesla trailing some major competitors.
Tesla Energy will find a new home
One business that's seemingly lost in Tesla is Tesla Energy, which includes its solar power system installation unit and its energy storage offerings. It has been well-documented that Tesla's solar ambitions have been a disaster, but its energy storage business has done well in part due to a manufacturing partnership with Panasonic. Still, Tesla Energy's gross margin was just 12.4% in 2019 and the business is likely losing money when operating costs are considered. Solar and energy storage haven't proven to be a great bundle with electric vehicles, and that's ultimately a strategic problem when it comes to keeping them together.
Over the next five years, I think Tesla will begin to unwind its energy business as competitors take market share. The truth is that Tesla's future is in electric vehicles and autonomous driving, not solar or energy storage, and the energy business will be a distraction as the core business grows.
Where will Tesla's stock go from here?
Tesla has had free sailing in electric vehicles so far, but that's changing as manufacturers like Volkswagen, Porsche, GM, Ford, and others enter the market in a serious way. Positive reactions from consumers to their new offerings could put pressure on Tesla's volume growth and margins.
Where I think Tesla is getting too much credit in its $144 billion market cap is in autonomous driving. The company hasn't proven it can make a fully autonomous vehicle, and analysts think it's behind the competition. Even if EV sales continue to grow, autonomous ride-sharing will likely take market share, and other companies are better equipped to serve that market.
Given the competitive forces coming, I would not buy Tesla's stock today. It's a disruptive company, no doubt, but it hasn't proven that it's able to make money, and at the end of the day, that's what the auto, energy, and transportation businesses are all about.