Tesla (TSLA -3.75%) CEO Elon Musk has never shied away from bold predictions. Last year, he said Tesla would eventually eclipse the combined value of Apple and oil giant Saudi Aramco, which implied a valuation north of $4 trillion at the time. But Musk dialed up his conviction during the latest earnings call with the pronouncement that Tesla could grow fivefold or even tenfold in value.
Here's how that breaks down: Tesla was worth $924 billion on the day of the earnings call, so Musk implied a future valuation of as high as $9.24 trillion. But shares have slipped about 12% since the call took place, so if Musk is reading the tea leaves correctly, Tesla stock could soar about 1,025% from its current price.
Is the stock worth buying?
Tesla is prioritizing vehicle volume over margins
Tesla topped expectations on the top and bottom lines in the second quarter. Revenue climbed 47% year over year to $24.9 billion, and generally accepted accounting principles (GAAP) net income increased 20% to $2.7 billion.
But Wall Street fixated on margin compression. Tesla reported an operating margin of 16.8% last year, the highest among volume carmakers, but that metric fell to 9.6% in the second quarter as the company cut vehicle prices to stimulate demand amid challenging economic conditions.
Given the choice, management would make the same decision again, rationalizing that it makes sense to prioritize volume right now because autonomous driving technology will ultimately be the primary source of profitability. To quote Musk, "It's better to ship a large number of cars at a lower margin, and subsequently harvest that margin in the future as we perfect autonomy."
Going forward, the bull case for Tesla centers on two large opportunities: electric vehicles and autonomous driving technology (which includes full self-driving (FSD) software and robotaxi services).
Tesla is the market leader in battery electric vehicles
Tesla gained market share in battery electric vehicles (BEVs) through the first half of 2023, due in part to the Model Y becoming the best-selling vehicle of any kind in the first quarter. The company accounted for 21.8% of BEV sales through June, up from 19% in the same period last year, and nearly seven percentage points ahead of its closest competitor.
Better yet, Tesla still has one of the highest operating margins in the auto industry, and Musk attributes that success to manufacturing prowess and innovation. For example, Tesla produces battery packs (the most expensive component of an electric car) at a lower cost per kilowatt-hour than other automakers, and its leadership is expected to last through the decade, according to Cairn Energy Research Advisors.
Tesla plans to press its advantage with a potentially revolutionary assembly process at Gigafactory Mexico, where vehicle production will begin in 2025. The so-called "unboxed" assembly process could cut manufacturing costs in half and reduce factory footprint by 40%, according to Reuters.
Suffice it to say, Tesla has a strong foothold in the electric car market, which bodes well for shareholders. Precedence Research says electric vehicle sales will increase by 23% annually to reach $1.7 trillion by 2032.
Tesla is a front-runner in autonomous driving technology
Tesla is arguably a leader in the race to build a truly autonomous car. The company has far more autopilot-enabled vehicles on the road today, so its autonomous driving data eclipses that of all other automakers combined. And more data theoretically means superior artificial intelligence (AI) software.
In this case, that means FSD software, a product that creates three new revenue streams for Tesla. First, FSD can already be sold directly to drivers, and demand should increase as the product improves. Second, FSD can be licensed to other automakers, and Musk says the company is currently discussing that option with a major manufacturer. Third, once perfected, FSD software will power the dedicated robotaxi Tesla plans to mass-produce next year.
For context, Precedence Research says the autonomous vehicle market will increase at 35% annually to hit $2.4 trillion by 2032, and Cathie Wood's Ark Invest says robotaxi taxi platforms could generate $9 trillion in annual revenue by the end of the decade. Those revenue streams could have a profound impact on profitability. Musk recently told CNBC's David Faber that robotaxis could boost gross margin to 70%, an astonishing leap from 18.2% in the most recent quarter.
Elon Musk is not alone in making bold predictions about Tesla
Earlier this year, Ark Invest published a valuation model positing colossal returns for Tesla shareholders. It detailed a bear scenario and a bull scenario, valuing the company at $4.4 trillion and $7.9 trillion, respectively, by 2027.
Similarly, tech analyst Gene Munster recently told CNBC that Tesla and Alphabet's Waymo were the two companies best positioned to benefit from self-driving cars. That bullish take aligns with past commentary, including his prediction that Tesla could be worth $2.5 trillion by 2026.
So Musk is not alone in making bold predictions, but investors should never put too much weight on such prognostications. They will be better off focusing on hard facts. Tesla has a strong competitive position in several multitrillion-dollar markets, and its valuation could rise substantially if all goes according to plan in the future. Investors simply need to answer this question: Can Tesla successfully pivot into FSD software and robotaxi services?
Those who find that idea farfetched should avoid the stock. But those who believe Tesla could disrupt the transportation and mobility industries with autonomy should feel comfortable buying the stock today. Shares currently trade at 9.5 times sales, a discount to the three-year average of 16 times sales, and a very reasonable multiple for a software and services company.
