Tesla (TSLA 0.49%) stock is a favorite among growth investors, as the possibilities in front of it are enormous. With aspirations for robot taxis, full self-driving vehicles, robots, and anything else CEO Elon Musk can dream up, Tesla could have an unbelievably wide market.
But much of its anticipated growth is already factored into the stock. The electric vehicle (EV) maker carries an ultra-premium valuation based solely on future expectations. Still, no one wants to invest in a stock that marks time; they want growth. Tesla investors, in particular, have become accustomed to unbelievable returns as the stock turned a $10,000 investment five years ago into $104,000 today.
So, could Tesla stock double in the next five years? Here's what it would take.
Tesla's margins are facing serious pressure
Currently, Tesla has a market cap of around $800 billion, so a double would give it a value equivalent to Alphabet or Amazon. That's a big leap for Tesla, but may be feasible if everything works out.
One of Tesla's biggest problems right now is that its margins are falling. Because management wants to keep its EVs competitive with other vehicles on a monthly payment basis, it has repeatedly dropped its prices. This took a heavy toll on its margins over the past year.
TSLA Gross Profit Margin (Quarterly) data by YCharts.
And things aren't looking any better heading into 2024. Under the new regulatory standards that were enacted through the Inflation Reduction Act, EVs only qualify for the full $7,500 federal tax credit if a certain percentage of their battery materials are sourced and built domestically. The thresholds rise every year, and starting in 2024, buyers of some Tesla EVs will only receive a $3,750 credit. Whether Tesla will compensate for that tax credit reduction by cutting its prices again remains to be seen, but this could be a headwind for Tesla's sales.
That said, Tesla's strategy of dropping prices to help keep sales strong is working. In Q3, Tesla produced 430,000 vehicles (up 18% year over year) and delivered 435,000 (up 27% year over year). Those are solid growth figures, and with Cybertruck deliveries starting, overall production figures should get additional boosts over the next five years.
Tesla needs to sustain its growth projections to double
In 2021, Tesla stated that it wanted to grow its deliveries by a 50% compounded annual growth rate (CAGR). It still stands behind that projection, although it may fluctuate from year to year. From the last twelve months delivery figure of 1.793 million, that would mean Tesla would be delivering 13.6 million vehicles. Should Tesla do that, it would deliver more vehicles annually than Ford or General Motors, combined.
While that may seem far-fetched, remember that Tesla also has a strong presence in Europe and China, so it's competing in a much larger market. Additionally, Elon Musk has also stated his goal is to produce 20 million vehicles annually by 2030. So is 13.6 million vehicles possible?
With about 58 million vehicles sold worldwide in 2022, that would mean Tesla would account for nearly one-quarter of global vehicle sales.
In Q3, its revenue per automotive delivery was around $45,000. However, I'd expect this figure to rise significantly for several reasons. First, as interest rates fall, Tesla will likely raise its prices. Second, the Cybertruck starts at around $60,000, with the better-equipped models (with features like all-wheel drive, which most pickup buyers will opt for) rising to $80,000 or more. Both factors (along with the general rises in prices that occur over time) should push Tesla's revenue per delivery upward. Tesla's peak margins occurred in Q2 2022 when it produced nearly $60,000 per delivery, so I'll use $60,000 per delivery as the basis for my 2028 calculations.
Assuming that, plus modest growth (20%, far below its long-term average) in its energy and services line items, Tesla is projected to have about $850 billion in revenue in 2028.
If Tesla can regain its previous peak margins (about 15%), it will produce earnings of $128 billion. Dividing the market cap needed for the stock to double ($1.6 trillion) by those projected earnings would give Tesla a forward valuation of 12.5 times earnings. Currently, Tesla trades for about 79 times forward earnings, so this would also be a decline in valuation by that metric and closer to what a traditional automaker trades around.
Still, 13.6 million annual deliveries is an aggressive goal, and Tesla may not be able to hit it. But even if it grows to two-thirds of the projected deliveries (about 9 million), then it would still trade at a reasonable 20 times earnings.
That's not even including all of the other exciting tech like full self-driving, semi trucks, or robo taxis. Now it's unknown if any of these would come about by 2028, but they are other factors to consider.
So, can Tesla stock double in five years? Absolutely. It just needs to return to having strong margins and achieve the growth rates that it forecast in 2021 while becoming the top U.S. automaker. Will it be easy? Absolutely not.
Time will tell if Tesla can meet those difficult goals, but it isn't out of the question.
