It's easy to quickly conclude that Tesla's (TSLA +0.91%) growth is likely to slow dramatically in a high interst rate environment. After all, vehicle affordability suffers in high-interest rate environments because consumers often finance their vehicle purchases. But investors betting Tesla's growth will take a hit may want to think twice.
There are three main reasons Tesla could continue growing rapidly even if interest rates remain high for a multiyear period.
NASDAQ: TSLA
Key Data Points
Cybertruck
The most obvious reason to be bullish on Tesla's near-term growth prospects is the launch of its long-awaited Cybertruck. The all-electric truck, with its polarizing design, has garnered more than two million reservations, according to estimates from a crowdsourced reservation tracker. This is an extraordinary number for a vehicle virtually no one has been inside or seen on the road. Even if this crowdsourced figure is off materially, we know interest for the Cybertruck is high because Tesla CEO Elon Musk said shortly after the truck was first unveiled that pre-orders for the vehicle broke 250,000 in less than a week.
Today, Tesla's sales are derived from just four vehicles: two sedans and two SUVs. As Tesla's first pickup truck, the vehicle will likely be a major catalyst for further sales growth as it opens up the company to a new segment of the market.
Of course, it takes time to ramp up production of a new vehicle. With deliveries expected to start before the end of the year, it may not be until the second half of 2024 that Cybertruck deliveries start contributing meaningfully to total sales volume.
Electric vehicles are still in their early innings
Even if the overall auto market suffers because of a high-interest rate environment, electric vehicle sales may still continue growing nicely because of market share gains. As a study by Cox Automotive recently found, electric vehicle sales still only accounted for 7.9% of total sales in the U.S. market during the third quarter of 2023. But this was up from 7.2% of sales in the year-ago quarter.
Because the electric vehicle market is still small, early, and taking market share, Tesla is likely to benefit from this momentum -- even during a tough macroeconomic market.
Tesla can be aggressive on price
Finally, there's Tesla's ability to aggressively cut prices while still remaining profitable. Because the company is the most scaled electric vehicle maker in the U.S., it's able to use its economies of scale to lower prices to help offset some of the headwinds consumers are facing from higher interest rates.
Depending on the Tesla model, most of them now cost tens of thousands of dollars less than they did at the start of the year. While some lower input costs have been part of the driver behind Tesla's price reductions, much of its price cuts represent aggressive margin-reducing moves from the company to make its vehicles more affordable and help demand continue growing in line with production.
Fortunately, Tesla is still reporting big profits even while lowering prices. It reported a quarterly profit of $2.7 billion in the second quarter of 2023 while generating positive free cash flow of more than $1 billion even though most of its big price cuts occurred at the start of the year.
In one final nod to Tesla bulls, the company's lucrative driver-assist software, which costs $12,000, can help offset some of the pressure it is seeing on margins from lower prices on its vehicles. Further, Tesla believes the price of this software will increase over time as it gets better. This premium software is a secret weapon most of Tesla's competition is far from emulating.
Strong sales momentum
Just a few weeks ago, Tesla reiterated its guidance to produce around 1.8 million vehicles this year. Assuming deliveries track production, this would translate to 37% year-over-year growth.
Tesla's upcoming Cybertruck launch, the tailwind of growing demand for electric vehicles overall, and aggressive pricing should all help contribute to another year of strong growth for the automaker, even in the face of high interest rates.
