Tesla Stock Plunged 15% in April, But Here's Why That's a Long-Term Opportunity

Tesla (TSLA -1.11%) is the global leader in electric vehicle (EV) production and sales. Not only have its cars set the technological standard for the industry, but so have the manufacturing processes inside its gigafactories.

As a result, the company makes EVs at a higher gross profit margin than any of its competitors. But amid the difficult economic climate, Tesla has slashed prices across its fleet to spur demand, which sent its margins lower in the first quarter of 2023.

Tesla stock reacted negatively to financial results released on April 19, and it closed the month with a 15% loss. Along with the sell-off in the broader technology sector last year, the stock is now down 60% from its all-time high. Here's why that's a long-term opportunity.

Facing a short-term demand problem

Consumers around the world have been grappling with soaring inflation and rising interest rates for the last 18 months. As a result, many big-ticket items are being cut from household budgets, and electric vehicles might be among them. 

According to a survey conducted earlier this year by the Associated Press with the Energy Policy Institute at the University of Chicago, 47% of Americans are unlikely to buy an EV as their next car. In fact, just 19% of the 5,408 respondents said they were very or extremely likely to go electric the next time they're in the market for a vehicle.

A whopping 83% of the people who were unlikely to buy an EV said cost was a factor. With that in mind, it's perhaps no surprise that Tesla has cut prices six times so far in 2023, which sent its gross profit margin down to 19.3% in Q1, from 29.1% in the year-ago period. That also impacted the company's bottom line, with its earnings per share shrinking 21% year over year.

But since the company is the only profitable manufacturer of EVs, it can afford to put some pressure on its competitors by lowering prices. That comes at an important time, because legacy automakers like Ford and General Motors are ramping up production of their EV models, and a host of start-ups in the industry are also growing quickly. As consumers are given more choices, demand for Tesla's vehicles could also be potentially diluted. 

But the EV industry is a long-term story

There are many things working in the electric vehicle industry's favor. First, both the United States and Europe intend to ban the sale of cars that run on petrol and diesel by 2035, which will spark a transition to EVs.

Second, costs will come down as more EV makers achieve scale, which will result in more sales. According to an estimate by Cathie Wood's Ark Investment Management, global EV production could soar from 7.8 million units in 2022 to 60 million units by 2027. That represents a compound annual growth rate of 50% which, coincidentally, is exactly the production growth rate Tesla expects to achieve. CEO Elon Musk believes the company will be producing 20 million vehicles by 2030, up from an estimated 1.8 million this year.

Thirdly, if history is any guide, gas prices will likely continue to rise in the years to come, while owning an EV will become cheaper and more convenient than ever. The Biden administration wants to see 500,000 public charging stations in the U.S. by 2030; to give you some perspective, there are about 145,000 gas stations across the country today.

And according to Ark Investment Management, four years ago it took roughly 40 minutes to charge an EV to drive 200 miles. That's down to 15 minutes today, and could drop to four minutes within the next five years.

Tesla is about more than just electric vehicles

The decline in Tesla stock offers investors the opportunity to buy into a host of the company's other technology initiatives beyond EVs, at a price far below where it was trading just a couple of years ago. On a valuation basis, Tesla stock trades at a price to earnings (P/E) ratio of 42 right now. While that's still a premium to the broader stock market (the Nasdaq-100 trades at a P/E of 27), it's significantly below the company's peak P/E of over 1,000 back in 2021.

Tesla is a leading producer of artificial intelligence-powered self-driving software, which is expected to facilitate the company's move into the autonomous robo-taxi business sometime in 2024. Early estimates by Ark Invest suggest self-driving cars could enable a new era in ride hailing, creating $14 trillion in value by 2027.

Plus, Tesla is also powering residential homes with its solar and battery storage products, and demand is soaring. In Q1, the amount of battery storage capacity deployed climbed by 360% year over year as the company's production capabilities gradually caught up with supply.

And in 2027, Tesla could begin to sell its Optimus humanoid robot, which will have applications in low-skilled jobs like manufacturing.

In short, the opportunity in the electric vehicle industry is enough of a reason to own Tesla stock for the long term, and it might be just one of the company's sources of value in the future.