It is said that the proof of the pudding is in the eating. Tesla (TSLA 2.65%) has proved that it can deliver consistent performance, quarter after quarter. Less than a decade ago, several investors outright dismissed Tesla as an unviable business. But this group has largely vanished, and there is hardly any disagreement now on the viability of Tesla's business.
The discussion has now shifted to the massive valuation of Tesla's stock. Not that this argument is entirely unreasonable, but there are aspects of the stock that the Tesla bears might be missing. Let's discuss some key factors that investors should consider while deciding whether to invest in the stock or not.
What drives Tesla
In the first quarter of this year, Tesla's revenue grew by 81% over the same quarter last year. The company's net profit margin rose to 17.7%. For starters, that is more than three times the margins that auto companies typically generate.
Data source: Tesla. Chart by author.
There are several factors, strategic and operational, behind the higher margins. But let's focus on the most fundamental factor that has taken Tesla where it is today: a focus on innovation.
It is no secret that Tesla commands a leading position in the electric vehicle market because it made electric cars feasible. It is equally well known that the company almost went bankrupt in the process. However, it stuck to its cause and emerged as a winner. But electric cars aren't the only thing that Tesla, and its Chief Executive Officer Elon Musk, worked on. The company tried its hands on several other businesses and innovations but haven't found much success so far in these.
As an example, Tesla's "aesthetically appealing" solar roof tiles haven't found many takers. This gets reflected in the losses from its energy business.
Image source: Statista.
Tesla's energy generation and storage segment incurred a gross loss of $51 million in Q4 2021. The segment's gross loss swelled to $72 million in Q1 this year. Fortunately, the losses from the segment are minuscule compared to Tesla's overall profits.
Image source: Tesla.
What can drive Tesla's growth in the future?
Disappointments have never dissuaded Tesla from innovating. In addition to continually improving its electric cars, the company is focusing on numerous other initiatives. It is working on improving full self-driving features of its cars, as well as developing a driverless robotaxi.
Tesla is also working on improving its batteries, which may significantly boost the range of its cars. The company expects that its new battery cells -- named 4680 based on their dimensions (46 mm in diameter and 80 mm in height) -- will be better in terms of cost and range performance than other alternatives in the market by next year.
Separately, Tesla is also expanding its insurance business and aims to make Tesla insurance available to 80% of customers in the U.S. by the end of 2022.
Finally, there is the Optimus robot, which not many are taking seriously. Musk even rued about the fact that "people did not realize the magnitude of the Optimus robot program" during the call. A decade ago, not many people took electric cars seriously too.
In short, though there is no guarantee that any of Tesla's ventures will succeed, historical evidence suggests that one or more of them will.
