Tesla (TSLA -2.04%) reported solid financial results for the second quarter, beating expectations across the board. Deliveries soared 83% year over year as the company leaned into discounts, revenue rose 47% to $24.9 billion, and net income climbed 20% to $0.78 per diluted share. But Wall Street took issue with the price cuts, which pushed Tesla's operating margin to a two-year low, and the stock price slipped 10% following the report.
Wedbush analyst Dan Ives had a different reaction. He raised his price target on Tesla stock to $350 per share, and he praised Tesla for sacrificing profits in the short term. Ives said he believes prioritizing volume over margins today will make Tesla more profitable as it monetizes its full self-driving (FSD) technology in the future.
Ives elaborated in his research note on Tesla by drawing an interesting comparison: "We view Tesla where Apple (AAPL -0.69%) was in the 2008/2009 period, as [the company] was just starting to monetize its services." Ives opined that Tesla is playing chess while other automakers are playing checkers.
Where was Apple in 2008 and 2009?
Apple had a market cap of $175 billion at the beginning of 2008. That figure dropped as low as $70 billion during the year before rising to $190 billion by the end of 2009.
Of course, Apple is worth a lot more today. In fact, it recently became the first $3 trillion company, meaning its market cap has increased more than 15-fold in less than 14 years.
Hardware innovation undoubtedly played a role. Apple benefits from immense brand authority and consumer loyalty born of its ability to stay on the cutting edge of consumer electronics. The last 14 years have seen the company launch several new generations of the iPhone, debut the iPad and Apple Watch, and design the M1 and M2 chips. But Apple has also branched into services during that time, a move that unleashed its profitability. Dan Ives said he believes that evolution is responsible for much of its share price appreciation.
Apple surpassed 2 billion active devices this year, and it monetizes that installed based with adjacent services like iCloud storage, Apple Pay, and App Store downloads. The company also provides subscription content like Apple News+, Apple TV+, and Apple Music. Those services generate recurring revenue that earns much higher margins than cyclical hardware sales. Indeed, Apple achieved a gross profit margin of 36.1% in 2008, but that figure has since risen 710 basis points to 43.2% over the trailing 12 months.
Wedbush strategist Dan Ives says Tesla is in a similar position today. Wall Street has yet to recognize its true earnings potential because the company is just starting to build a software and services business atop its electric car business.
Artificial intelligence (AI) software and services
Tesla has two tremendous opportunities in artificial intelligence (AI) software and services, something that Ives argues is not reflected in the stock price. The first opportunity involves selling its FSD software directly to drivers, or licensing its FSD software to other automakers. Either way, CEO Elon Musk says the product earns close to 100% gross margin, and the global autonomous vehicle market is projected to grow at 35% annually to approach $2.4 trillion by 2032, according to Precedence Research.
The second opportunity involves using FSD-equipped cars to commercialize autonomous ride-hailing services. Tesla has not discussed a specific timeline, but the company plans to build a robotaxi next year, and the long-term implications are staggering. Ark Invest estimates that autonomous ride-hailing platforms will earn $9 trillion in annual revenue by 2030, and Musk says robotaxis could push gross margins to 70% (or higher), representing a radical increase in profitability from the 18.2% gross margin reported in the most recent quarter.
Tesla is working from a position of strength in both markets. The company has collected more autonomous driving data than other automakers, an advantage that hints at superior AI software, and its cars are outfitted with what Musk calls the "most efficient inference computer in the world."
Buying Tesla stock today could be like buying Apple stock in 2009
Tesla shareholders are unlikely to see 15-fold returns over the next 14 years, but the premise behind Ives' analogy to Apple is still valid: Tesla is currently building its hardware base in preparation for its evolution into AI software and services. So investors who focus on minute margin fluctuations from one quarter to the next may miss the big picture. At some point, assuming all goes smoothly, FSD software sales and robotaxi services could launch Tesla into the stratosphere by opening new revenue streams that earn much higher margins.
To that end, Ark Invest estimates that Tesla could be worth $7.9 trillion by 2027, and Musk says the company's valuation could increase tenfold from its current level, implying a market cap of roughly $8.5 trillion at some point in the future. Those projections make a compelling case for buying a small position in this growth stock today.
