Tesla (NASDAQ: TSLA) stock began 2020 priced at $84. By the end of 2020, the Tesla stock price had risen 945% to $794. There was a five-to-one stock split in August 2020. In December 2020, Tesla became a member of the S&P 500. Both of these events could have added fuel to the fire under the Tesla stock price, but there were also operational highlights. Tesla produced 509,737 cars in 2020 and made a profit compared to making a loss on 370,232 cars in 2019. In fact, consistently reporting quarterly profits is what made Tesla stock eligible for S&P 500 inclusion.
The Tesla stock price has not enjoyed the same success so far in 2021. Perhaps a pullback was only natural after such a surge. I, however, think this might be a sign that other investors could be questioning Tesla’s stratospheric stock price.
Electric vehicle competition
By the end of the decade, Volkswagen wants 70% of its EU and 50% of its US and China sales to be electric vehicles. It hopes to sell 1m electric vehicles this year. US-based General Motors has announced plans to phase out internal combustion engines entirely by 2035. Although Tesla undoubtedly enjoys a first-mover advantage, some serious, committed competition will not allow for the total market dominance scenarios advanced for Tesla.
Tesla makes good money by selling regulatory credits to legacy automakers to offset their fleet CO2 emissions. Without these regulatory credit sales, Tesla would be unprofitable. Over 2020, its operating margin would have been 1.38% compared to 6.32% when they are included. Tesla will likely see its credit revenues dwindle as competition continues to intensify. But, losing credit revenues will not be an issue if car sales and margins continue to increase.
Robotaxis of the future
I don’t expect to see wide adoption of fully autonomous vehicles — go anywhere, in any weather, without a human behind the wheel — inside 10 years. For that reason, I don’t think Tesla will sell millions of cars for use as dedicated robotaxis or to individuals looking to generate an income from sending their cars off to work. I think Tesla will have to become a true mass-market manufacturer to sell more cars. That means Tesla’s current mass-affluent average sales price of around $56,000 will have to fall towards a mass-market one. For reference, the current average sales price of a car in the US is about $20,000.
Well-off Tesla owners add solar panels, batteries, and fast chargers to their homes. I expect the uptake of energy generation and storage solutions by Tesla car owners to fall as it expands into the mass-market, putting the brakes on that source of revenue growth.
Tesla stock price
If I assume the company sells 11m cars in 2030 at an average sales price of $26,000 with an operating margin of 11%, I can see more upside on the current Tesla stock price of $670. However, selling an extra million or so cars each year for a decade while improving margins tenfold and halving the average sales price is optimistic. And even if that did happen, the Tesla stock price would still be trading at eye-watering earnings multiples in a decade for anything other than low single-digit stock price growth. Of course, if the mass adoption of fully autonomous driverless cars looks likely in the near term, it would definitely change my mind about Tesla. I do think they have an advantage there.