Tesla (TSLA +3.29%) is currently valued at $690 billion, making it the sixth-largest public company in the world. However, CEO Elon Musk made the following comment during the latest earnings call: "I see a potential path with Tesla worth more than Apple and Saudi Aramco combined." That bold statement values the company at $4.5 trillion, and others on Wall Street are even more optimistic.
Asset management firm Ark Invest published a valuation model earlier this year that discusses three possible scenarios. The most optimistic of the three (i.e., the bull scenario) values Tesla at $6.7 trillion by 2026. Similarly, New Street Research analyst Pierre Ferragu said he believes Tesla could be worth $10 trillion by 2030, but only if the company achieves its production target of 20 million cars per year.
Those bullish forecasts imply significant upside for Tesla shareholders, ranging from 550% to 13,490%. But bears will undoubtedly argue the stock is already overvalued, as Tesla is currently worth more than the next eight automakers combined.
Is Tesla stock a buy?
NASDAQ: TSLA
Key Data Points
Tesla's strongest competitive advantage
Despite missing delivery estimates, Tesla delivered another round of solid financial results in the third quarter. Revenue climbed 56% to $21.5 billion, and free cash flow (FCF) soared 148% to a record $3.3 billion. But the most exciting news was that the company once again posted an industry-leading operating margin -- this time, it rose to 17.2% -- reinforcing CEO Elon Musk's prediction that manufacturing efficiency would be its strongest competitive advantage.
What's driving that efficiency? At the risk of sounding dramatic, Tesla has reimagined what it means to be an automaker. In addition to popularizing electric cars, the company bypassed dealerships to pursue a direct-to-consumer sales strategy, and it eschewed traditional advertising in favor of media coverage and word-of-mouth marketing. Those risks have paid off. Tesla has built a premium brand image that inspires consumer demand, and it has achieved that success while eliminating expenses that legacy automakers take for granted.
That said, Tesla has also brought technological innovations to the table. For instance, when the company introduced its 2170 battery cell a few years ago, Musk said it was both the cheapest and the highest energy density cell in the world. Cairn Energy Research Advisors corroborated that claim, noting that Tesla pays less per kilowatt-hour for battery packs than any other automaker. That's particularly noteworthy because battery packs are the most expensive part of an electric car, meaning Tesla has a significant cost advantage. Better yet, the company is now scaling production of its next-generation 4680 battery cell, which promises to further reduce costs.
Additionally, Tesla makes the front body and rear body of the Model Y from a single piece of metal at its new Gigafactories in Germany and Texas. That single-piece casting technique results in 1,600 fewer welds per vehicle, which translates into cost savings in the form of less time spent welding and fewer welding robots on the factory floor.
Looking ahead, investors have plenty of reasons to be excited. The first Tesla Semi will be delivered later this year, and the Cybertruck will enter production next year, meaning the company is expanding into new automotive verticals. Additionally, during the latest earnings call, Musk reiterated previous guidance about growing deliveries by 50% annually over the long term. The company aims to produce 20 million cars per year by 2030, a goal that will require about a dozen Gigafactories.
With that in mind, Grand View Research says global electric vehicle sales will total $1.2 trillion by 2027, meaning Tesla has hardly scratched the surface of its market opportunity.
Image source: Tesla.
Full self-driving (FSD) technology could be a game changer
Ultimately, management expects full self-driving (FSD) technology to be the biggest source of profitability for Tesla. That transition will take place in two phases.
First, Tesla will launch its FSD beta software across North America this quarter; Europe and other parts of the world will follow, pending regulatory approval. Of course, demand for FSD software will likely rise once the product is out of beta (i.e., once it offers true autonomy), but the company should still see an uptick in subscription software revenue in the near term. Second, Tesla plans to launch an autonomous ride-hailing service at some point in the future. Management has not provided a specific date, but the company does have a robotaxi set for production in 2024. To that end, Tesla may be equal parts automaker, software vendor, and services provider a decade down the road.
That evolution could be a game changer from a financial perspective. Analysts at UBS Group estimate the robotaxi market could exceed $2 trillion per year by 2030, and Ark Invest says autonomous ride-hailing platforms could generate $2 trillion in annual profits by 2030.
Additionally, Tesla CFO Zach Kirkhorn says there is "quite a bit of upside on margins from a software perspective." That means FSD represents not only a massive addressable market but also an opportunity for Tesla to become more profitable in the future.
Better yet, Tesla is well positioned to lead the autonomous vehicle market. With a fleet of 3 million autopilot-enabled vehicles, Tesla collected more autonomous driving data than any other automaker, and data is the cornerstone of artificial intelligence.
A stock worth buying for risk-tolerant investors
Tesla stock trades at 71 times earnings and 10.6 times sales. Those valuation multiples look exorbitant when compared to other automakers. For instance, Toyota stock trades at 8.4 times earnings and 0.7 times sales. Tesla's pricey valuation will likely make the stock volatile in the coming months, but it doesn't necessarily mean Tesla is overvalued. Only time will tell.
If Tesla meets its long-term production targets and gains traction with FSD software and services, the company could be worth much more a decade down the road -- maybe even $10 trillion. That is why I have no plans to sell my stake in Tesla, and it's why risk-tolerant investors should consider buying a few shares of this growth stock today.
