When investors think of owning shares in Tesla (TSLA +2.15%), they often think of owning shares in a company that will eventually dominate the automotive industry.
In a way, that's fair, because Tesla has disrupted the automotive industry in a way only a small handful of companies ever have.
But here's the truth: Tesla doesn't have to dominate the automotive industry to be a massive winner for investors. In fact, Tesla can fail to sell vehicles at mainstream volumes and still be a massive winner, and here's how.
Margins matter
Sure, it would be nice for a Tesla vehicle to outsell mainstream vehicles. But that notion ignores the fact that an automaker can sell well in a niche, and at lucrative margins that make investors drool.
Here's a comparison that many investors don't consider, but they should. Ferrari (RACE 1.60%) does not sell vehicles at mainstream volume, so it always has demand exceeding supply, which inflates vehicle price tags, exclusivity, and, more importantly, margins.
Just take a glance at the graph below, showing the lucrative difference in margins between Ferrari and mainstream automakers -- and consider the impressive growth Tesla has logged between the two.
RACE Operating Margin (TTM) data by YCharts
The simple truth is that Tesla shares more attributes with ultra-luxury automaker Ferrari as an investment than it does with mainstream Detroit companies Ford Motor Company (F 1.06%) and General Motors (GM 0.20%) because of its niche position in the overall auto market and elevated margins that mainstream autos will likely never reach.
Tesla owns an impressive brand image, it records lucrative margins that already exceed what mainstream automakers can ever dream of logging, and its wealthier target consumer is likely less affected by economic downturns.
Perfect opportunity
Investors can look at the current bear market, coupled with Tesla's 70% decline over the past year, and they can look at the current pessimism facing the automotive industry, with rising interest rates and an uncertain economy, and be fearful of the future.
NASDAQ: TSLA
Key Data Points
Or savvy investors can digest the pessimism and consider this an opportunity to buy shares of an automaker that can fail to sell mainstream levels of vehicles and still be a lucrative investment.
Consider that Tesla's third-quarter revenue jumped 56%, compared to the prior year, with EBITDA jumping 68%. Tesla also continues to optimize its manufacturing and push its scale, all while the electric vehicle industry is poised to boom in the coming years.
Knowledgeable investors understand that historically, when EV sales reach 5% of new vehiclesales in a country, they rapidly accelerate from there. The U.S. industry hit that point a year ago, and it is now anticipated that EV sales could spike to 25% of new vehicle sales as soon as 2025.
Not only can Tesla grow its share of the EV pie in the years ahead, but it can simply continue to do what it already does well: sell vehicles that resemble luxury Ferraris more than traditional mainstream vehicles.
The wildcard
What Tesla has accomplished over the past decade has been nothing short of impressive. Remember that history is filled with failed automakers; in fact, there are nearly 100 bankrupt automakers that started with the letter "A". However, despite Tesla changing the game for EVs, and a strong brand, it is possible that polarizing CEO Elon Musk could be a wildcard for investors.
Love him, or hate him, there's little question that Musk has a lot on his plate when it comes to running companies. Some investors can be deterred from his antics, or the potential for him to be distracted with buying Twitter or running SpaceX, among other things. It's possible Musk is simply taking more heat currently because the stock is having a rough year, competition in the EV industry is increasing, and the overall automotive industry faces economic uncertainty and rising interest rates.
It's also possible some investors have simply had enough: "I am 100% in Tesla [because] I believe in Elon Musk and Tesla. But he is killing [shareholders] and Tesla. If I knew I wouldn't invest in Tesla." said Leo KoGuan, Tesla's third-largest individual shareholder, on Twitter. It's wise to take emotional tweets with a grain of salt but, while Tesla has many positives going for the company, Musk is a wildcard to consider when investing long-term.
The race is only beginning
The current bear market and pessimism in the automotive industry shouldn't matter to long-term investors. It merely gives savvy investors an opportunity to own shares of a company like Tesla, which can literally fail to dominate sales volumes and still be incredibly lucrative.
