Tesla (TSLA) Stock: Reasons to Buy The Pullback
CONTRIBUTOR
Richard Saintvilus
PUBLISHED
NOV 13, 2023 8:07AM EST
Investors who have held Tesla (TSLA) stock over the past thirty days have begun to question that decision. Its shares have fallen almost 20% over the past month, which puts the stock in negative territory in the trailing three months, during which it has fallen 13.5%, while the S&P 500 index has fallen just 2.25%.
Since the electric vehicle maker reported its third quarter earnings on October 18, TSLA stock has given up as much as 20%, falling to a low of $194. While the stock has recovered since then, reaching $214 as of Friday's close, there’s still a 30% gap from its 52-week high of $299. All of this, however, should be presented in the context of the fact that Tesla is still out-performing the market on a year-to-date basis, rising 74%, while the S&P 500 index has risen 15% year to date.
For investors who are waiting for the dust to settle, there are still plenty of reasons to expect Tesla stock to march higher. The stock has gotten grossly oversold as a result of Tesla missing Q3 estimates on both earnings and revenue for the first time in three years. While Wall Street continues to focus on the company’s pricing challenges and headwinds related to its Cybertruck, the market has seemingly overlooked the positives the company announced in its Q3 earnings report.
First, let’s focus on the company's revenue, which has grown over the past decade to the projected $92 billion this fiscal year, up from just $1.7 billion. For some context, that revenue growth equates to a compound annual rate of almost 50%. If that is not impressive enough, Tesla management expects that growth rate to continue until 2030. Assuming Tesla’s revenue growth takes a slight dip to, say, 30% annually, that still puts the company’s projected revenue total to north of $500 billion in the next decade. Will there be any question at that point where Tesla ranks among EV auto manufacturers?
Unlike Tesla’s EV competitors, Tesla over the next five years is poised to show revenue growth in higher-margin service businesses. Again, while the market is focused on the near-term headwinds revealed in the Q3 earnings report, it was noteworthy that Tesla's management spent a significant amount of time discussing high-margin services such as its Full Self-Driving (FSD) software, which is poised to reenergize the company’s profit margins once it is fully operational.
The company is betting heavily on FSD, which will be the birth of the autonomous vehicle evolution. The platform is designed to automate Tesla vehicles so they can operate without a driver behind the wheel. Tesla's FSD is at Level 3 automation (conditional driving automation), which means a driver should be engaged at all time. However, once FSD can navigate autonomously, it will not only boost Tesla’s profit margins, it will be a profit center of recurring revenues for Tesla through the company’s ambition for Robotaxis.
Tesla is aiming to take a bite out of Apple’s (AAPL) playbook of how it grew its higher-margin services business. Apple’s Services division which includes subscriptions, warranties, licensing fees, and Apple Pay is expect to post almost $60 billion in total revenue in fiscal 2023, equating to 17% of Apple’s total revenue of $360 billion. In the case for Tesla, its efforts to monetize its FSD feature by licensing the FSD software to other EV makers, can be just as lucrative.
Essentially, Tesla’s current competitors may become the company’s partners. In that vein, the market has seemingly forgotten that Tesla's superchargers have essentially become North American standard. Tesla announced charging deals with both General Motors (GM) and Ford (F) which hints of the sort of consolidation that will further drive Tesla’s dominance in the EV space. Tesla’s increased focus on in building profitable services will be its main growth driver. As such, with Tesla stock currently trading at $214, now’s an ideal time to buy.
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