TSLA: Not Just an EV

Key takeaways

• Climate-conscious Gen Z and millennials are accelerating the shift towards electric vehicles, paving the way for a cleaner, more sustainable future.
• Tesla, the market leader, is driving the EV revolution with breakthrough battery technologies, state-of-the-art EVs, and an expansive charging network.
• The monumental milestone of manufacturing 1 million vehicles at Tesla’s Gigafactory signals the dawn of the EV era.
• Tesla’s decision to prioritize volumes over profit margins has helped it stay ahead of competition in the EV space.
• Diverse revenue streams point towards a larger vision beyond just cars, including innovative services like the highly anticipated Full Self-Driving technology.

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The world is witnessing a massive transition. The century-old reliance on internal combustion engine (ICE) vehicles is yielding to a cleaner, more sustainable future dominated by electric vehicles (EVs). These EVs, producing zero emissions, have emerged as an effective countermeasure against the pressing issue of climate change. This shift is greatly facilitated by significant progress in battery technology, which has enhanced the range of EVs, making them a more practical option for everyday use. In addition, governments worldwide are providing financial incentives, making these EVs more affordable for consumers.

Understanding this new reality, consumers are showing increased interest in EVs. As of 2022, global EV sales reached 6.6 million, marking a 60% increase from 2021 (see Figure 1). Predictions suggest the EV market could see 20 million sales by 2025 and 50 million sales by 2030. This radical shift is creating new landscapes, prompting traditional automakers to rethink their strategies, and enabling new players to revolutionize the market.

There are two key reasons why EV sales will continue to grow over the next decade. First is a generational shift in consumer preferences and the second is favorable regulatory tailwinds in the US.

Generational shift in climate consciousness

A significant moment that sparked a surge in the EV market is the generational shift in attitudes toward climate change and environmental concerns. Younger generations, particularly millennials and Gen Z, exhibit a deeper concern for the environment and climate change compared to their predecessors. According to a study by the Pew Research Center, a substantial 72% of these younger individuals are very or somewhat concerned about climate change. More specifically, 57% say they are very or somewhat likely to buy an electric car in the next five years. This rising environmental consciousness has ignited a sea change in consumer preferences, shifting away from ICE vehicles and creating a surge in demand for EVs.

This shift is not just a matter of preference. The reality of climate change is becoming more urgent, as revealed by studies from institutions like the Intergovernmental Panel on Climate Change. Their research indicates that EVs can reduce greenhouse gas emissions by up to 60% compared to ICE vehicles. The knowledge of this fact has not only made EVs more attractive to environmentally conscious consumers but has also led to a surge in demand. 

Policy push

US government policies have notably aligned with the goal of advancing the adoption of electric vehicles (EVs). A significant legislative achievement in this respect was the Inflation Reduction Act (IRA) of 2022. Primarily enacted to curb inflation and spur economic expansion, the IRA carried substantial implications for the EV industry.

Key among these was the extension of the EV tax credit, offering up to $7,500 per vehicle, till the year 2032. Moreover, it also introduced tax credits for installing EV charging stations. By reducing the cost of EVs and making charging more accessible, these policies have succeeded in driving up demand for such vehicles.

As the societal awareness and demand for EVs grew, a company stood out amongst the crowd – Tesla, led by Elon Musk. Tesla is not just another automaker trying to meet the demand for EVs. It was a revolutionary player, known for its long-range, high-performance EVs with sleek designs that captured the imagination of consumers across the globe.

Tesla the company

Over the last hundred years, more than 100 new car companies have started in the US. But only two of them, Ford and Tesla, have not filed for bankruptcy till date. When Tesla started many thought starting a new car company was a bad idea, and starting a company for electric cars was even worse. Still, Tesla, started by Elon Musk and some others, has overcome a lot of problems. They almost went bankrupt while they were starting to make the Model 3 car, but now they are the most valuable car company in the world.

Tesla was the first company to really push electric cars. They made the first electric car that could legally go on highways and run for 200 miles without needing to be recharged (see Figure 2). That was the Tesla Roadster, which came out in 2008.

Since 2009, Tesla has sold over 1.9 million electric cars. This is a big deal because making and selling cars requires a lot of money and is a tough business to get into. But Tesla is doing really well and keeps getting more popular.

Tesla’s focus isn’t limited to just creating electric vehicles. The company also invested heavily in the development of EV charging infrastructure. Tesla understood that the success of EVs relied not just on the vehicles themselves, but also on the convenience and accessibility of charging them. This led to the development of Tesla’s Supercharger network (see Figure 3), which grew to be the largest and fastest-growing EV charging network worldwide.

In the midst of all these developments, Tesla was also making breakthroughs in battery technology. The company used lithium-ion batteries, known for their high energy density, fast charging, and long lifespan, which provided significant advantages over other types of batteries. Moreover, Tesla employed a unique prismatic cell design for its batteries, which was more efficient than the cylindrical cell design used by other automakers. Furthermore, the company was committed to reducing its carbon footprint and environmental impact, exploring the use of recycled lithium and cobalt, and working to develop new, more efficient, and less polluting battery technologies.

Achieving scale

The pinnacle moment came in the Spring of 2020. Tesla’s Gigafactories, which had been working tirelessly to meet the rising global demand, finally achieved a milestone – it crossed the 1-million vehicle mark. This achievement not only signaled Tesla’s impressive production capabilities but also marked the dominance of electric vehicles in the mainstream auto industry. With the manufacture of its millionth vehicle, Tesla had established itself as the leader in the EV market.

Investor confidence also soared. Tesla’s stock price, surged to record highs, mirroring the company’s numbers. Investors worldwide flocked towards Tesla, seeing the potential for further growth and returns.

Meanwhile, Tesla unveiled a new, game-changing technology – a solid-state battery. The solid-state battery, promised to be the next big thing in the EV world, was the result of years of research and development. It offered better energy density, charging times significantly less than the conventional lithium-ion batteries, and improved safety features. This battery technology, touted as Tesla’s secret weapon, was seen as a game-changer that could potentially redefine the future of electric mobility.

The announcement of the solid-state battery further amplified the excitement around Tesla. It validated the company’s strategy to continuously innovate and push the boundaries of what’s possible with EV technology.

Numbers speak

Tesla’s strides in the second quarter of 2023 marked a clear, tangible success. Delivering 466,140 electric vehicles, Tesla surpassed expectations, effectively setting a benchmark for the electric vehicle industry. Production numbers (see Figure 4) also painted an impressive picture, reaching 479,700 vehicles, signaling that the company’s efforts to increase production efficiency were indeed bearing fruit.

Figure 4: Yearly vehicle deliveries by Tesla. Source: Company filings 

The growth represented an 83% increase in deliveries compared to the same period the previous year, and a 10% sequential growth from the first quarter of 2023. 

Tesla’s calculated pricing strategy to prioritize volume over profit margins in 2023 emerged as another win. This strategy played a key role in prompting competitors to adjust their pricing to remain competitive. While global automobile demand experiences a downward trend, Tesla has made a calculated decision to prioritize volume over profit margin in 2023 (see Figure 4). While margins are stabilizing in the 17-20% range, this shift in focus will maximize sales and expand their market share in anticipation of future Full Self-Driving (FSD) applications.

Tesla’s success is not confined to the automotive industry alone. A clear trend of diversifying revenue streams began to emerge, moving beyond automotive-related revenues. This included services like after-sale vehicle assistance, supercharging, retail merchandise, insurance, and the highly anticipated Full Self-Driving technology. The declining dependence on automotive-related revenues and the rise of other services solidified Tesla’s identity as a multifaceted entity, demonstrating its potential to reshape industries beyond the automotive realm.

The road ahead

Tesla’s growth, however, is not only limited to the automotive sector. Its other revenue streams, such as after-sales vehicle assistance, supercharging, retail merchandise, and insurance, continue to grow. Even though the full realization of the Full Self-Driving technology is still under development,, hinting at yet another potential game-changer for Tesla.

Full Self-Driving Potential

Tesla has a backlog of deferred revenue streams for its Full Self-Driving (FSD) features, ongoing maintenance, internet connectivity, complimentary Supercharging programs, and over-the-air software updates.  The balance is at $134 million as of December 31, 2022. FSD will present enormous opportunities for Tesla. Implementing this high-potential revenue stream necessitates the logical decision to prioritize volume over margins and could be a reliable source of income in the future.

As we contemplate these astronomical figures, the question that lingers amidst such stratospheric valuations is whether investors and market participants harbor unwavering confidence in earnings growth stemming from other segments or services, including the Energy and storage realm and the elusive Full Self-Driving (FSD) technology. While the path to FSD’s realization appears promising, its global implementation could take anywhere from a year to several more. In this scenario, the premium associated with such prospects should be significantly higher. Yet, lingering doubts cloud the journey, rendering it imprudent to solely fixate on hope and promises. Uncertainty reigns, and a prudent approach demands attention.

Another piece of Tesla’s business that has growth potential is their Energy business.

Energy Business

Tesla Energy’s products are a promising new way to generate, store, and use solar energy (see Figure 6). The company’s products are still in their early stages of development, but they have the potential to make clean energy more affordable and accessible to consumers. 

Here are some additional details about Tesla Energy’s products:

• Solar roofs: Tesla’s solar roofs are made of tempered glass tiles that are embedded with solar cells. The tiles are designed to look like traditional roof tiles, so they can be installed on any type of roof. Tesla’s solar roofs are more expensive than traditional solar panels, but they are also more efficient and durable.
• Solar panels: Tesla’s solar panels are made of monocrystalline solar cells. The panels are available in a variety of sizes and wattages, so they can be customized to meet the needs of any home. Tesla’s solar panels are also more efficient than traditional solar panels, and they come with a 25-year warranty.
• Powerwall: Tesla’s Powerwall is a battery storage system that can store up to 13.5kWh of electricity. The Powerwall can be used to power homes during power outages, or it can be used to store excess electricity from solar panels for later use. Tesla’s Powerwall is also more efficient than traditional battery storage systems, and it comes with a 10-year warranty.

Bottom line

Tesla’s rise has been a remarkable one. The company has helped to change the way we think about cars, the way we power our homes, and the way we interact with the world around us. Tesla has shown us that the future might just be electric, and it is working towards making that future a reality. It is a company that is changing the world, and is sure to continue to make waves in the years to come.

Portfolio fit

Might be for

• Investors with a long-term horizon. Tesla is a growth company, and its stock price is likely to be volatile in the near term. However, over the long term, Tesla has the potential to grow significantly as the adoption of electric vehicles accelerates.
• Investors who believe in Tesla’s mission. Tesla is not just a car company. It is also a technology company that is working to accelerate the world’s transition to sustainable energy. Investors who believe in Tesla’s mission may be willing to pay a premium for its stock.
• Investors who are looking for a high-growth stock. Tesla is one of the fastest-growing companies in the world. In 2022, its revenue grew by 81%. If Tesla can continue to grow at a similar pace, its stock price could deliver significant returns over the long term.

Might not be for

• Investors who are risk-averse. Tesla is a volatile stock, and its price could decline significantly in the short term. Investors who are risk-averse may want to avoid investing in Tesla.
• Investors who are looking for a dividend-paying stock. Tesla does not pay a dividend. Investors who are looking for a dividend-paying stock may want to consider other companies.
• Investors who are concerned about Tesla’s environmental impact. Tesla’s cars produce zero emissions when they are driving, but the production of Tesla’s cars does produce some emissions.

Ultimately, whether or not Tesla is a good fit for your portfolio depends on your individual investment goals and risk tolerance. If you are considering investing in Tesla, it is important to do your own research and understand the risks involved.