Long-term investing is the key to sustainable returns in the stock market. While short term strategies are tempting, they can expose your portfolio to volatility and costs associated with bid-ask spreads. Holding for the long haul helps smooth out these challenges, giving you time for a company's fundamental value to shine through.
Let's discuss why investors should take a long-term perspective on Tesla (TSLA -0.95%) as it navigates through an uncertain economic environment in the electric car industry.
1. The price cuts are a good thing
According to projections from Goldman Sachs, electric vehicles (EVs) will make up a whopping 61% of global car sales by 2040 as technological improvements and government support boost the industry.
Yet despite the massive total addressable market, automakers face demand pressure as economic conditions sour and competition rises. Tesla is dealing with these headwinds through price cuts. While the company frequently adjusts its prices, the trend has been downward, with Reuters reporting that global prices fell 20% at the start of 2023.
While these moves have spooked some investors, they will be key to Tesla's transition from a niche automaker into a mass market leader that can control a meaningful chunk of total EV sales when the industry matures.
2. The competition is on the ropes
While Tesla's volume-focused strategy looks set to deliver long-term benefits, the near term will not be easy -- as evidenced by the company's first-quarter earnings report.
Operating margins fell from 16% to 11.4% year over year, causing income from operations to fall by 26% to $2.66 billion. But while the price cuts are hurting Tesla to an extent, they also seem to be putting some of its less well-capitalized rivals on the ropes.
Image source: Getty Images.
For example, pure-play EV competitor Lucid saw its first-quarter revenue of $149 million fall below analysts' expectations of $210 million while its operating loss ballooned by 29% to a whopping $772 million. Tesla CEO Elon Musk believes Lucid is "tracking toward bankruptcy" because of its unsustainable losses. And the intensifying price war could put the final nail in the coffin by making it harder for the unprofitable rival to scale up.
In its 2023 investor day presentation, Tesla's management announced plans to reduce the cost of next-generation vehicles by half by leveraging manufacturing innovations. If they pull this off, it could create even more room for the company to engage in price competition while keeping its profit margins up.
3. Tesla has additional growth drivers
Tesla is more than just an automobile company. It is on track to become a diversified green technology leader, with energy generation and storage set to be its next big growth driver. In the first quarter, segment sales grew by 148% year over year to $1.5 billion on surging demand for Tesla's power walls and megapacks designed to store solar energy.
While energy is currently a small part of Tesla's total business, the breakneck growth rate means it will become increasingly key to the company's long-term thesis. Management plans to support continued growth by investing in its manufacturing capacity through new megapack factories in Lathrop, California and Shanghai, China.
Tesla should also benefit from the increasing sophistication of AI technology, which could have use cases in automotive applications like self-driving. While this opportunity is in its nascent stage, Tesla has some competitive advantages because of its massive data collection, with over 150 million self-driving miles driven to date. Management plans to build on this advantage by offering a one-month free trial of its "full self-driving," which could help market the service while gathering more information.
Long-term, Tesla investors certainly have a lot to look forward to these days.
