Please ensure Javascript is enabled for purposes of website accessibility

1 Metric From Tesla Earnings Shows Bears Are Framing Competition the Wrong Way

By Evan Niu, CFA - Apr 29, 2021 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's less about Tesla vehicles competing with other EVs and more about beating out gas cars.

For years, Tesla (TSLA -0.57%) skeptics and bears have warned that competition is coming, at which point the electric-vehicle (EV) leader would get crushed by legacy automakers with deeper pockets and more established manufacturing operations. Most traditional automakers have been dragging their feet in the development and launch of competitive EVs, but 2020 seemed to be an inflection point for EV adoption.

It's worth noting that battery pack prices dipped below $100 per kWh for the first time last year, according to Bloomberg New Energy Finance, a critical milestone in the path toward making EVs more cost-competitive with internal combustion engine (ICE) vehicles. A slew of traditional automakers have also unveiled new EVs or laid out long-term strategies to electrify their product portfolios over the past year. In no uncertain terms, EV competition is coming and will intensify, but that's the wrong way to frame the rivalry.

Gray Tesla Model 3 sedan with a city skyline in the background

Image source: Tesla.

Categorical competition

Tesla reported first-quarter earnings results earlier this week, and the company included an incredible metric: 98% of trade-in vehicles are ICE cars. Prominent brands that were being traded in include Toyota, Honda, Ford, and BMW. Just 2% of the vehicles that customers traded in when buying a Tesla were EVs.

This makes sense on a number of levels. Automotive upgrade cycles are fairly long, with most new car buyers keeping a new vehicle for around six years. If someone purchased an EV within the past six years, it's unlikely that they are looking to buy a new car of any brand soon. Due to that lengthy timeline, the auto market tends to move fairly slowly in general. EVs still represent a tiny portion of the broader market, comprising just 3% of cars sold in 2020. There simply aren't as many EVs out there to trade in, and the ones that are in operation are relatively newer.

In terms of Tesla facing increased competition, more compelling EVs is a good thing for EV adoption. The best way to look at competition is categorically. Instead of comparing Tesla EVs with another brand of EV, investors should focus more on how EVs will cannibalize and continue slowly chipping away share of ICE vehicles in the years and decades ahead.

There will undoubtedly be EV shoppers that compare Tesla to other brands, some of which will opt for the other brand for any number of reasons. But there is a far greater number of prospective customers that currently own ICE vehicles and will eventually adopt the newer technology, particularly as EV prices continue to decline due to falling battery costs. Rising adoption will benefit all EV makers.

"As more OEMs join our mission by launching EVs, we believe consumer confidence in EVs continues to increase and more customers are willing to make the switch," Tesla wrote in its letter to shareholders.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$695.20 (-0.57%) $-4.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
323%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.