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Tesla (LSE: TSLA) has had a crazy few years. The shares surged and investors saw huge returns as the firm became the main player in the electric vehicle (EV) market. And still, all that might pale into insignificance compared to what’s to come.
The car maker is poised for big things, and there’s a multi-billion dollar reason why I’d buy in today.
To explain what that reason is, let’s recap a little. The important detail is that Tesla dominates the EV space at the moment. And even that might be understating it.
On margins alone, the firm is light years ahead of anyone else. Nio? Hasn’t turned a profit yet. Rivian? Hasn’t turned a profit yet. Tesla? Making oodles of cash on every car it sells.
In 2022, the average margin on Tesla EVs was $9,800. For context, the margin on an average Toyota is $1,200. So even compared to legacy ICE (internal combustion engine) cars, it’s way ahead.
Tesla pulls this off thanks to some unique advantages. For one, it sidesteps the dealership model of selling cars. Selling directly means higher margins. Another is that it spends nothing on advertising. The firm relies on word-of-mouth and, let’s face it, Elon Musk’s Twitter (or X) profile.
Cheap prices
These big margins led Tesla owner Musk to reduce prices this year. Its Model Y dropped from $64,990 to $47,740. That’s a steep drop and looks even steeper in a year of such high inflation.
Based on projected deliveries, these cuts might drop the bottom line by as much as $3bn this year. At first glance, it seems a strange move. A bad one, even. Why give up all those earnings? Well, the answer might be a great reason to buy in here. Here’s why.
Cheap prices can help Tesla continue to dominate market share. This helps the firm in a few ways.
For one, more of its cars on the road means more use of its Supercharger charging network. If Tesla’s network becomes the industry norm then it would be a major source of revenue.
Also, more cars means more data. That data could be used to steal a march as self-driving vehicles are introduced. Could Tesla dominate this market too? I’d like to be a shareholder if so.
Musk says “we are not starting a price war” but it’s going to be very hard for its unprofitable rivals to keep up. I think investors feel the same way too. Tesla shares have more than doubled year-to-date.
Now, there are risks here. As I mentioned, the reduced prices will cost billions a year. That’s passing up a lot of money. Particularly considering its cars are so prevalent they might be nearing market saturation.
The pay off
Also, while Tesla will still be immensely profitable, the shares don’t come cheap. A forward price-to-earnings ratio of 53 looks expensive. I bought in when it was much cheaper and I’m pretty happy I did. Although with earnings set to grow, this could still be a good entry point.
Either way, the next few years are going to be very exciting for the firm. Will Musk’s multi-billion dollar gamble pay off? It very well might do.
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