There's no doubt that Tesla (TSLA 2.03%) has been one of the single greatest investments in the past decade. Shares have skyrocketed 2,830% since November 2013, a gain that trounces the Nasdaq Composite index by an incredibly wide margin.
But investors ultimately only care about what the future will look like. So, where will this electric vehicle (EV) stock be in three years? Here are some important factors to think about.
Challenges on the horizon
Tesla commands about 50% of the EV market in the U.S., a position that has come about thanks to its first-mover advantage in the space. In other words, Tesla basically spearheaded the EV industry, making these cars more popular among a larger group of people.
In the latest quarter (the third quarter of 2023 ended Sept. 30), the business delivered 435,000 vehicles. Founder and CEO Elon Musk said in the Q3 update that Tesla will produce 1.8 million cars this year, a clear sign of its huge scale. And the company generated revenue of over $23 billion in Q3, up 9% year over year, much slower growth than in recent times. The introduction of the highly anticipated Cybertruck can help boost these figures, though.
However, the path going forward for Tesla will almost assuredly be more difficult than in the past few years. And that's due to the intense competition in the industry. Not only are there domestic automotive manufacturers to deal with, like Ford Motor Company, General Motors, Rivian Automotive, and Lucid Group, but numerous international rivals as well.
This competitive landscape is evident when looking at the seemingly never-ending price cuts Tesla has implemented this year. The result has been shrinking margins, which is perhaps the new reality that investors will have to get used to in the years ahead.
NASDAQ: TSLA
Key Data Points
Game-changing potential
Despite margin pressures, Musk continues to argue that the long-term outlook for Tesla is extremely bright. He hasn't shied away from revealing his grand ambition of one day launching a global fleet of autonomous Teslas that operate a robotaxi service. In this scenario, the plan is for Tesla to register outsize profits.
A key aspect of this goal is to keep developing the company's artificial intelligence (AI) initiatives. Dojo, Tesla's internal supercomputer system, collects troves of data from drivers of its cars. And this provides the ability to constantly analyze traffic trends that can one day bring about full self-driving capabilities.
According to Ark Investment Management CEO Cathie Wood, the robotaxi industry could produce revenue of $9 trillion by the end of this decade. Therefore, it makes total sense why Tesla is aiming to be a leader in this area.
Don't forget the valuation
Tesla's stock is up 91% just in 2023 (as of Nov. 27). Add this to a long history of strong returns, and it's no surprise that shares are a bit expensive, trading at a price-to-earnings (P/E) ratio of 76 at the moment. For comparison's sake, the Nasdaq-100 trades at a P/E multiple of 29, indicating Tesla's premium status.
From my perspective, this valuation is too steep, and so I'm not a buyer of Tesla shares at these levels. I think the high P/E ratio creates a major headwind to producing market-beating returns over the next three years, particularly as competition continues to get stiffer. Additionally, the possibility that interest rates will stay higher for longer means that cars may be less affordable for consumers.
However, I fully understand why some more bullish investors will take a chance on the stock. If you really believe that Tesla can become more than just purely an EV maker, showing substantial progress in other areas like AI and its robotaxi ambitions, then maybe that's enough justification to buy shares.
But in my opinion, this stuff can't be predicted with any level of certainty. I view it as more of a moonshot bet than sound investing. This is why I'm hesitant to become a Tesla shareholder.
