With only six companies in the world valued at $1 trillion or greater, finding the next one to join this rarified club could potentially be a lucrative endeavor for investors. And with Tesla (TSLA +3.01%) currently sitting in seventh place -- at just shy of a $850 billion valuation -- it's likely next in line to be worth $1 trillion.
But can it do so by next year? Or will it take a bit longer for Tesla to cross this threshold? Let's try and find out.
Tesla has an ultra-premium valuation
Back in 2022, Tesla was already a member of the $1 trillion club, garnering its highest valuation of $1.24 trillion early last year. Now, it's looking to rejoin this exclusive group permanently, but there are some caveats.
One of the first items you'll hear about before investing in Tesla is how expensive the stock is. The next-largest car company by valuation is Toyota, worth just over $250 billion, despite having more than triple Tesla's revenue. Even domestic automakers, like Ford Motor and General Motors, have nearly double Tesla's revenue and are only valued at about one-twentieth of Tesla.
So how can this smaller company be valued at such an incredibly high level?
NASDAQ: TSLA
Key Data Points
It all boils down to future expectations. Tesla is the leader in electric vehicles (EVs) domestically. Excluding pickup trucks made by the Big Three, the best-selling vehicle in August 2023 was the Toyota RAV4, with the Tesla Model Y in second place. That's an impressive positioning for a car that only comes in electric form.
Worldwide, Tesla still is the top dog in pure EV sales (not including hybrids), but Chinese automaker BYD is starting to close the gap. In Q2, Tesla delivered more than 466,000 vehicles (up 86%), while BYD sold 352,000 (up 95%). Still, with Tesla cementing itself as either the top dog or second-largest producer in a field expected to see massive adoption in the coming decade, investors want a piece of the pie.
Throw in ancillary businesses like solar panels, energy storage, autonomous driving, and future vehicle launches, and it's no surprise why Tesla is valued the way it is. But is there room for upside?
Margins are starting to fall at Tesla
Of any chart out there, this is the one that Tesla investors fear most.
TSLA PE Ratio data by YCharts
From a price-to-earnings (P/E) perspective, Tesla is a highly valued stock, regardless of whether you classify it as a tech company or an automaker. Furthermore, it's trading near its highs for the year, so investors can't pick up shares for cheap prices. With its forward P/E roughly equal to its trailing P/E, it also conveys that analysts believe Tesla won't grow its earnings over the next year.
So what might be the cause? Shrinking margins. To shore up its EV market share as legacy automakers launch their EV products, Tesla has cut prices on many of its models, which has impacted its gross margin significantly over the past couple of quarters.
TSLA Gross Profit Margin (Quarterly) data by YCharts
Lower gross margins impact the profit margin because less money makes it to the bottom line. With Tesla's Q2 profit margin falling from 16% to 13%, it hasn't made a drastic impact yet. Plus, with Tesla growing its revenue by 47%, it allowed its earnings per share (EPS) to rise from $0.65 to $0.78.
Investors will be looking for Tesla's margins to stabilize soon. Otherwise, it's on a path to have the same margins as legacy automakers, which would defeat the purpose of Tesla having a premium over its competition.
I don't think that will happen, and Tesla will remain on its growth path. With the Cybertruck entering production, it should provide a significant boost for Tesla as it will begin to see a significant return on investment after going through multiple design iterations and buying tooling for the factory.
As a result, I wouldn't be surprised if Tesla stock can rise 19% in the next year to be worth $1 trillion. Tesla has positioned itself well in the world's transition to EVs and should join the trillion-dollar market cap club relatively soon as a result.
