If you're seeking a way to profit from the soaring adoption of electric vehicles (EVs) around the world, look no further than Tesla (TSLA -3.10%). Amid intensifying competition and mounting losses, many EV companies are struggling to survive. Tesla, however, is enjoying torrid sales and profit growth as it dominates the industry it helped create.
Here are some more reasons why you might want to buy the EV-leader's shares today, before the next bull run in its stock price begins.
1. Tesla's scale is a powerful competitive advantage
Tesla is rapidly scaling its manufacturing operations. Global-production lead Tom Zhu highlighted the accelerating pace at which the auto giant is currently building vehicles at the company's recent investor day presentation. He said:
It took us 12 years to build the first million, and about 18 months to the second million. The third million, 11 months. Then less than seven months to build the 4 millionth.
With more capacity coming online at its factories in Texas and Berlin, Tesla's manufacturing pace should continue to quicken in the coming year. That's key because automakers tend to enjoy efficiency gains as they ramp up production. This dynamic is playing out beautifully for Tesla right now as can be seen in its rapidly expanding operating margin.
Image source: Tesla.
Tesla's impressive profitability is allowing it to cut prices to win more market share. The plan appears to be working. Tesla is experiencing "unprecedented demand" for its EVs following the price reductions, according to sustainable energy news site Electrek.
CEO Elon Musk confirmed this to be true during the company's earnings call on Jan. 25. "Thus far in January, we've seen the strongest orders year to date than ever in our history," Musk said.
Tesla is working to drive down the cost of its vehicles even further. These initiatives include a more efficient powertrain factory format that's expected to be half the size of the company's current layout with no loss in capacity, as well as a new motor that doesn't require any expensive rare earth metals.
Tesla's aggressive pricing strategy and efficiency gains should keep the pressure on its rivals. Many of Tesla's competitors are already struggling to achieve profitability, and the EV leader's price cuts will likely make it even harder for them to do so.
Lucid, for one, was recently forced to slash roughly 18% of its workforce due to its mounting losses. Rivian, for another, laid off about 6% of its employees in February.
2. Tesla's profits are soaring
While its rivals struggle, Tesla is growing stronger. The EV-giant's revenue climbed 51% to $71.5 billion in 2022. Its operating income, in turn, surged 109% to $13.7 billion.
Tesla is also becoming a cash-generating machine. Its free cash flow jumped 51% to $7.6 billion last year. This impressive cash production, combined with Tesla's roughly $20 billion in cash and investments, makes the auto titan less reliant on external financing. That's a powerful advantage over competitors that have a greater need to take on debt to fund their operations.
Notably, Morgan Stanley analyst Adam Jonas believes Lucid's and Rivian's layoffs could be the start of an industrywide trend. He warns that more EV upstarts could be forced to scale back their growth plans as they struggle to raise capital in today's difficult economic environment. If Jonas is correct, that would widen Tesla's lead over the competition.
Other analysts are also taking notice of Tesla's comparative financial strength. Moody's recently raised Tesla's credit rating to investment-grade status to reflect its widening competitive moat.
"The rating action reflects Moody's expectation that Tesla will remain one of the foremost manufacturers of battery electric vehicles with an expanding global presence and very high profitability," Moody's senior credit officer Rene Lipsch said.
A higher credit rating will allow Tesla to access the debt market on more favorable terms should it choose to do so to accelerate its growth. Tesla's credit upgrade might also boost its standing among more risk-sensitive investors, which could increase demand for its stock and help to drive its share price higher.
