With its shares up a whopping 103% year to date, Tesla (TSLA -1.11%) clearly has a loyal following even as it faces near-term challenges related to a slowdown in electric vehicle (EV) demand and weakening margins. It seems investors are convinced that the company has the tools to navigate the currently choppy waters and emerge stronger than ever. Let's dig deeper and look at three ways Tesla is successfully pushing forward.
Tesla's auto business focuses on the long term
2023 has been a challenging year for the EV industry as headwinds like competition and slowing demand take their toll. The problem was evident in Tesla's third-quarter earnings report, where its total automotive revenue grew by just 5% year over year to $19.6 billion -- a sharp deceleration from the 55% growth rate it enjoyed this time last year.
According to CEO Elon Musk, the weak results have a lot to do with macroeconomic challenges like high interest rates, which make it harder for consumers to buy cars with loans. But competition is another problem as more companies pivot to the new opportunity. In response, Tesla has embarked on a cost-cutting strategy that has eaten away at margins.
But there is light at the end of the tunnel. For starters, the high rates won't last forever. And on the margin side, Tesla continuously invests in production efficiency to help it deal with the problem better than rivals.
In March, the company announced plans to use these manufacturing innovations to eventually halve the cost of its next-generation vehicles. And in October, that promise began showing signs of coming to fruition.
According to Reuters, Tesla may be working on producing a $26,867 EV at its factory in Germany. For context, its current cheapest car, the Model 3, starts at $38,990. Lower-cost options can help Tesla become a mass-market automaker that can make up for lower margins with higher volume.
Artificial intelligence could be a huge boon
While Tesla gets its auto business in order, the company has other growth drivers that investors should watch. The most exciting of these might be artificial intelligence. Management is working on a project called Dojo, a supercomputer designed to handle the massive amount of data generated by its Full Self-Driving (FSD) program, installed in around 285,000 cars.
Tesla plans to use this data to create breakthroughs in computer vision, which involves training algorithms to process video data, much like a human brain would. This tech could be the key to fully automated self-driving (Tesla's current system still relies on driver input). And progress here will strengthen Tesla's moat while creating new revenue opportunities like self-driving software installation, licensing, and robo-taxis.
Image source: Getty Images.
Morgan Stanley analyst Adam Jonas believes these efforts could eventually add $500 billion to Tesla's market capitalization and make software and services the company's main value driver going forward. And while these projections are extremely ambitious, they highlight Tesla's potential to turn self-driving technology into a key part of its operations.
The valuation is high, but you get what you pay for
With a forward price-to-earnings (P/E) multiple of 60, Tesla's valuation is notably high compared to the S&P 500's average of 24. But you get what you pay for in the stock market. And the electric automaker has historically been a pricey stock because of its leading position in a potentially transformative industry.
While macroeconomic pressure will slow growth in the near term, Tesla's mass-market strategy and investment in self-driving could unlock its next leg of long-term expansion.
