Tesla (TSLA 2.84%) has been one of the market's best-performing stocks since 2019 when the company's production of electric vehicles (EVs) really ramped up. But its shares started their run-up already at a steep valuation, and have only become more expensive in the meantime. Tesla stock is now priced at 330 times trailing-12-month earnings, and nearly 130 times its projected per-share profits for 2022. Yikes.
Except maybe it's worth the premium. While stepping into the stock at its persistently rich price can feel more than a little uncomfortable, the folks doing it may just have an incredible long-range vision on the EV movement. One simple chart tells the tale (and a second shows Tesla's earnings potential).
Image source: Getty Images.
The EV industry is still in its infancy
It's a bit difficult to believe with all the attention Tesla has garnered since it built its first EV back in 2008, but the company has only manufactured a total of around 2 million automobiles. And about half of those were made in 2021 alone. That's a fraction of the roughly 80 million vehicles produced worldwide every year. So it's surprising that Tesla boasts a higher market capitalization than the rest of the automobile industry combined, including titans like Ford (F +0.40%), General Motors (GM 0.08%), and Toyota (TM +0.33%).
But all these Tesla shareholders may know precisely where the business is going. EVs apparently are the future, if you believe the analysts; autos powered by fossil fuels are on the long road to obsolescence.
The graphic below puts this paradigm shift into perspective. The International Energy Agency (IEA) estimates that this year's sales of battery-powered passenger vehicles (including hybrids) will accelerate to 5.7 million from 2021's tally of 5 million. And that figure is expected to exceed 10 million by 2025, and 22 million in 2030.
Data source: International Energy Agency. Chart by author.
And those are just your typical driveway passenger cars. Factoring in electric buses and commercial vehicles, EV sales should exceed 25 million in 2030. The IEA outlook also assumes clean energy policies won't change over the course of the coming eight years. If they do, EV sales could top more than 40 million units in 2030, a number that Bloomberg agrees with.
Ford and GM will be deeper into the EV business by that point. But Tesla is the current market share leader in the space, and the auto industry's only major EV name that isn't partially held back by a legacy combustion-powered vehicle business. So its shareholders have every reason to expect the stock to grow into its frothy valuation. Even if it trails the industry's broad growth, the company could produce and easily sell 5 million electric cars in 2030. Assuming the relative cost of making its cars doesn't rise between now and then, Tesla could earn in excess of $30 per share that year. It's en route to that mark already.
Data source: Thomson Reuters. Chart by author. Revenue figures are in millions of dollars.
For perspective, the stock's trading at a much more palatable 38 times that 2030 profit projection.
It's all back-of-the-envelope math, and for that matter, so is the IEA's outlook. It's an outlook, however, that jibes with other expert opinions. For instance, the U.S. Energy Information Administration believes a total of 672 million EVs will be navigating the world's roads by 2050, with the IEA guessing that there will be at least 150 million EVs operating on the planet by 2030.
There are less than 30 million now.
A long drive ahead
While the bullish undertow is there, that doesn't necessarily make Tesla an easy name to own. The stock still trades at a steep premium to 2030's plausible per-share earnings, and much can happen to stoke volatility in the meantime. High lithium prices are one of these potential stumbling blocks. Unforeseen legislation is another. Yet another prospective pothole on the road ahead is competition from the likes of the aforementioned Ford or GM seriously stepping up their EV games. Eight years is a long time.
Investors willing to wait for the right entry point, though -- and then wait out the tough times for the stock -- are plugged into a great secular trend that seems established for (and even by) one particular company. That's Tesla.
