The stock market is soaring yet again. But this time, Tesla (TSLA -1.11%) is not leading the charge. In fact, the market is up in spite of the electric vehicle (EV) leader.
Tesla shares have fallen a whopping 34% year to date (YTD) as of this writing, while the Nasdaq-100 continues to rise. The stock is now off 60% from all-time highs, while the broad market is close to all-time highs.
We are at another crossroads with Tesla stock. Bulls will argue this is a perfect buying opportunity as the company prepares for its next leg of growth. Bears will argue the company is finally heading toward a normal valuation that a manufacturing-based business deserves to trade at.
Which group is right? Where will Tesla stock be in three years?
TSLA Total Return Level data by YCharts
More volume, lower margins
Tesla continued to grow its unit volumes in 2023. It delivered 1.8 million cars to customers around the globe, up from 1.3 million in 2022 and 936,000 in 2021. This is impressive growth at scale, making Tesla one of the premier manufacturers of not just EVs, but cars in general. For reference, the largest automaker in the world is Toyota, which produces just over 10 million cars every year.
But to get this unit growth, Tesla has had to lower its prices. Its main products have evolved to the cheaper Model 3 and Y products, which go for less than its older X and S models. On top of this, Tesla has chosen -- or perhaps been forced -- to lower prices on the Model 3 and Y to grow unit volumes. We can see this dynamic in the price of used Teslas, which have collapsed by half from a relative peak in early 2022.
Lower prices have translated to slowing revenue growth and lower margins. In 2023, Tesla's revenue grew by 19% to $97 billion, but slowed down to just 3% growth in the fourth quarter. Gross margins slipped from 25.6% in 2022 to 18.2% in 2023, with operating income falling 35% for the year. Margins are deteriorating as Tesla goes for a greater global scale.
Can offering a new vehicle save the day?
In order to reach even more customers, Tesla will likely need to come out with an even more affordable vehicle. It can only sell so many vehicles in the $40,000-and-over price range, even if it keeps dropping new vehicle prices for the Model 3 and Y around the globe. There are just not that many people on this planet who can afford to purchase a premium-priced EV.
To expand its pool of potential customers, Tesla is planning to bring out a new, cheaper vehicle within the next few years. Rumor has it's planned for sometime in 2025, with CEO Elon Musk giving a rough timeline in a recent earnings call. But readers should know that Musk timelines are never fully fleshed out, and this does not guarantee a new product will arrive in 2025. I think you can bet on a new product arriving within the next few years, though.
Offering a new vehicle could certainly help Tesla boost volumes. But if it comes at a cheaper price point of around $25,000, revenue growth will lag unit volume growth as the average sales price of all Teslas sold continues to decline. Investors need to factor this in when doing any estimates for Tesla's revenue potential in the coming years.
TSLA Operating Margin (TTM) data by YCharts
The stock still isn't cheap
Smart investors know that it doesn't matter what a stock is earning now, but what it will earn within a few years. When looking at where Tesla stock will be within a few years, we need to make an estimate on its financial trajectory. Let's be optimistic and say it can triple volumes compared to 2023 in three years due to the successful launch of its mainstream cheaper vehicle. With volumes tripled, revenue should be able to double due to lower average selling prices.
Lastly, we can assume that Tesla's profit margins will remain similar to 2023 at 9.2%. It will lose margin on cheaper selling prices, but should be able to make it up with economies of scale. Toyota has similar operating margins, for reference. Double Tesla's 2023 revenue to $194 billion and slap on a 9.2% profit margin, and Tesla could be earning $17.8 billion in three years.
Today, Tesla has a market cap of $512 billion. Divide that by $17.8 billion, and you get a price-to-earnings ratio (P/E) of 29, which is a tad above the market average. From my seat, this indicates that Tesla stock may go nowhere over the next few years. It certainly isn't cheap, even after this recent drawdown, and could be a value trap for investors for a long while.
If you want to buy the dip, you need to be much more optimistic on the company's forward growth. Otherwise, Tesla stock will remain dead in the water.
