In an economic landscape with record-level interest rate increases and persistent inflation, growth stocks usually struggle. As borrowing costs rise, liquidity dries up and volatility returns. Investor appetite shifts to alternatives like bonds and causes growth stocks to take a hit.
Yet, like any phase, this one will eventually fade and give way to a new growth cycle. When this will happen is difficult to predict, but once the market relents, there is one growth stock that long-term growth investors need to add to their portfolio while it trades at a discount: Tesla (TSLA -2.44%).
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Navigating the market
While pioneering widespread adoption of electric vehicles, developing humanoid robots, harnessing the power of artificial intelligence, and creating innovative energy storage solutions, Tesla has had a rough go with interest rates climbing and inflation rising. Since hitting an all-time high in 2021, Tesla shares are down nearly 50% today.
There are several reasons why Tesla is struggling, but the clearest one is that consumers are not buying cars at the same rate as before due to the increase in interest rates. To combat this, Tesla implemented a series of significant price cuts to its most popular models. While this has helped keep sales afloat, the lowered prices have made their presence felt in Tesla's profit margins. Even though revenue remains near record levels, gross profit margins are down to just under 18%, declining over five of the last six quarters.
While Wall Street has been fixated on tighter margins as investors grew accustomed to Tesla's history of breaking record after record, this market is not conducive to growth -- and Tesla knows it.
TSLA Gross Profit Margin (Quarterly) data by YCharts
Rare financial strength allows Tesla to prioritize R&D
In preparation for a more turbulent economic backdrop, Tesla has been adding to its cash position. Currently at a record $26 billion, Tesla has bolstered its cash and equivalents consistently since Q3 2021. All while holding only $2.1 billion in long-term debt.
With its strong financial position, Tesla is doubling down on its investment in research and development. Spending a record $1.1 billion alone in Q3, Tesla's focus is on weathering the current economic storm while building for a brighter future.
As it currently stands, Tesla's No. 1 priority is developing its autonomous driving software. With the help of its supercomputer, Dojo, Tesla processes large amounts of video data collected by vehicles to train artificial intelligence models that learn how to drive.
Progress remains before Tesla can reach the coveted Level 4 or 5 of autonomous driving, but it appears to be on the right path thanks to a recent breakthrough. Once reaching higher levels of autonomy, CEO Elon Musk plans to unveil a robotaxi business, an endeavor he believes has "quasi-infinite demand" and could be the catalyst that sends Tesla to a $10 trillion valuation.
Musk isn't alone in his belief that a robotaxi business could transform Tesla's revenue streams. Cathie Wood's Ark Invest released a report attempting to quantify just how impactful robotaxis could be for Tesla, and the findings were astonishing. Based on its Monte Carlo simulation, Ark analysts surmised that robotaxis could generate nearly $450 billion in revenue by 2027, a monumental increase of more than 300% from today's revenue levels.
Driving forward
Tesla's growth prospects are facing a bumpy road ahead, and it might take some time before the market is conducive to a resurgence of growth stocks. Nonetheless, this only adds to the attractiveness of Tesla's stock in the short term.
While the market continues to focus on Tesla's more immediate challenges, an opportunity presents itself to grab one of the most transformative and successful companies at a discount relative to its future potential. Musk likely said it best when describing the variances in gross margin and profitability as minor obstacles, since the introduction of autonomy "will make all of these numbers look silly."
