Tesla (TSLA 1.52%) has flat-out been one of the best investments in recent times. The stock has skyrocketed 1,000% in the past five years and 3,600% in the past 10. And in 2023, it's up 114% through the first six months of the year. This leading maker of high-end electric vehicles (EV) has certainly proven that it can accelerate anyone's portfolio into overdrive.
As of June 30, Tesla had a market cap of $826 billion, making it one of the most valuable companies in the world. What are the chances that by 2025, this top auto stock carries a valuation of $1 trillion, something it already achieved in late 2021? Let's find out if this 21% rise is in the realm of possibilities.
Rapid growth continues
Despite macro-headwinds, Tesla continues its blistering pace of growth. Revenue during the first three months of 2023 increased 24% year over year to $23.3 billion. While this does represent a marked slowdown from previous quarters, it's still healthy growth nonetheless. Tesla was able to beat Wall Street expectations with that top-line figure.
During the three-month period, the electric car company produced 441,000 units and shipped 423,000, both up more than 35% compared to the first quarter of 2022.
A bright future
Even after its fantastic growth over the past decade, investors have a lot to get excited about as we look toward the future. It is estimated that EVs only accounted for less than 10% of overall car sales in 2022 in the U.S. So there is clearly still a huge runway ahead as the industry continues on its path to electrification. Tesla, which generated 48% of its overall revenue in its home country in Q1 2023, is in the top position to benefit from this shift, as it has a leading market share domestically by a long shot.
Perhaps a disappointment to some shareholders, Tesla has decided to cut the prices of its cars multiple times over the past year. Elon Musk says that this is fully intended to boost volume and grow market share. Moreover, because Tesla keeps optimizing its manufacturing capabilities, and its cost structure gets more efficient, it is able to lower per-unit production expenses -- savings that can be passed to consumers.
Some critics might be skeptical of these pricing actions. But Musk views it all as part of Tesla's longer-term vision toward fully self-driving cars. He thinks that if autonomous technology works out, the value of a single Tesla will be worth more to the company than the initial selling price. So, it's all about growing the Tesla fleet that's out in the world.
Sky-high valuation
While Tesla has some favorable characteristics from a fundamental perspective, namely its leading market share and fast sales growth, investors need to think about another factor that is critical to potential stock returns: the valuation.
While the current price-to-earnings (P/E) ratio of 77 is lower than its historical average, it still looks expensive on an absolute basis. Tesla is still growing at a rapid clip, but it's reasonable to assume that this growth will gradually decelerate in the years ahead as its available market opportunity shrinks and competition stiffens. Should Tesla's stock really be trading at almost four times Ford's P/E and almost 13 times GM's P/E? I'm not sure.
A valid argument can be made that based on Tesla's historical track record, rising 21% in 24 months seems like an automatic outcome. In fact, if Tesla's stock increases at the average past annualized 10% pace of the S&P 500, it'll reach the trillion-dollar mark in 2025. But because it's hard to see such a high-flying business perform only in line with the broader index's long-term pace, the stock could very well climb much more than that.
To be clear, I have no clue what Tesla's price, or any stock's price for that matter, will do in the next couple of years. And no matter how smart a person might sound, I don't think anyone really knows this. Based on the discussion above, if I had to guess, I'd say that the business will hit a trillion-dollar market cap by 2025.
