Tesla (TSLA -1.11%) has done a wonderful job at rewarding shareholders in the past. Shares have skyrocketed 1,770% in just the last decade. This means a $10,000 investment back then would be worth a whopping $187,000 today.
But where will this leading electric vehicle (EV) stock be in three years? Here's what investors should be thinking about.
A competitive landscape
Investors have grown accustomed to seeing strong double-digit revenue growth from Tesla over the year. Things have slowed down dramatically, though.
In the latest quarter (the third quarter of 2023, which ended Sept. 30), Tesla generated sales of $23.4 billion, which was up just 9% year over year. This was the slowest pace of growth for the EV maker in at least the last 12 quarters.
On recent earnings calls, founder and CEO Elon Musk hasn't shied away from putting the blame on the unfavorable macroeconomic environment. These concerns are warranted, given the rapid rise of interest rates over the past couple of years, which make cars less affordable for consumers.
And with inflationary pressures still an issue across the economy, people are directing more of their spending toward essential items, a category that a new and expensive vehicle doesn't belong in. This is the operating environment Tesla is dealing with.
Besides macro issues, the competitive landscape is only intensifying. Chinese enterprise BYD just surpassed Tesla as the company selling the most EVs in the world in the last three months of 2023. There are also other rivals, from young upstarts all the way to legacy auto OEMs. It's safe to say that the next three years will be much more difficult for Tesla than the previous three.
This means that margins will probably continue to be under pressure. To its credit, Tesla's aggressive investments to bolster its manufacturing capabilities have resulted in reduced production costs, which have made the company consistently profitable since 2020. However, ongoing price cuts to keep its premium vehicles competitive in a crowded industry are having a negative impact, as Tesla's Q3 gross margin of 17.9% was down from 25.1% in the prior year.
The potential for autonomous capabilities
Tesla has become a story stock due to the wild support that Elon Musk gets. He's arguably one of the best entrepreneurs ever, and investors have long bought into his ambitions, no matter how grand.
One of these is the possibility of full self-driving (FSD) capabilities, which would basically allow passengers to be asleep in the car while it's driving on its own with no human intervention. Musk has delayed the potential introduction of this game-changing software due to technical challenges. Investors should remain skeptical about the timeline, even though the business continues investing in its AI Dojo supercomputer, a tool used to develop Tesla's FSD tech.
Nonetheless, there's huge financial upside should FSD features become a reality. Musk said that recent margin compression shouldn't be a concern, given that once FSD is introduced, Tesla will be able to launch a global fleet of autonomous robotaxis that he says should generate "quasi-infinite" demand.
It's anyone's guess if this will happen within the next three years, but it's something to keep close tabs on.
Don't ignore the valuation
Although Tesla's current price-to-earnings ratio of 70.7 has been falling since about three years ago, there's no doubt that it's still an expensive price to pay to own the stock. As I noted, investors seem to place a premium on Elon Musk's abilities and vision. Additionally, maybe the market is already pricing in the certainty of the robotaxi goals.
I hesitate to want to pay this type of valuation for growth that is likely to slow and for profitability that is likely to continue being under pressure in the years ahead. This makes it hard to be optimistic that shares will outperform the market in the next three years.
