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Why the Long-Term Bull Thesis on Tesla Stock Remains Strong

Luke Lango

It has been a rough few months for Tesla (NASDAQ:TSLA). Just as it seemed that Tesla stock was ready to roar to permanent, new highs due to its successful ramp of Model 3 production and a hugely profitable third quarter, TSLA stock started moving in the opposite direction.

Why the Outlook of Tesla (TSLA) Stock Remains Healthy

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Ever since that post-earnings rally which pushed the shares to $375 in late 2018, Tesla stock has shed nearly 30% of its value. TSLA  now trade hands for less than $270.

Why the big selloff of TSLA stock? There were various reasons for it. There are concerns that demand for the Model 3  is slowing after a big 2018 surge. International demand is a big question mark, too. There are also continued concerns about the company’s management and the departure of its top executives. Meanwhile, its competition is heating up, and  the big profit it generated in Q3 wasn’t replicated in Q4. Finally, TSLA may swing back to a loss next quarter, and the Model Y didn’t live up to the hype.

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Overall, there have been a plethora of headwinds which have weighed on Tesla stock over the past several months. But, much like other headwinds that have hit this stock before, they are largely much ado about nothing.

The big picture of Tesla stock remains favorable. The global electric-vehicle market continues to grow by leaps and bounds, and TSLA continues to be the most relevant and innovative player in that market. As long as that remains true, Tesla will remain on track to one day become the most important auto company in the world, delivering millions of EVs every year and raking in billions of dollars in profits.

The price of Tesla stock simply doesn’t reflect that future reality. As a result, the recent weakness  of TSLA stock should be embraced, not avoided.

The First Big Idea: The EV Revolution

In the big picture, there are two big ideas underlying Tesla stock: the EV revolution and Tesla’s leadership role in that revolution. Everything else should be largely ignored because it will be drowned out in the long run.

With respect to the first big idea, the EV revolution is underway and only gaining momentum. Combining data from InsideEVs and the OICA, we can see that the global EV market has gone from 320,000 deliveries (a market share of 0.5%) in 2014, to 2 million-plus deliveries (nearly 3% market share) in 2018. More than that, market-share expansion is actually accelerating, with 2018’s EV share expansion (more than one percentage point) far outpacing 2017’s EV share expansion (roughly 0.6 percentage points).

In other words, the EV revolution is not only happening globally, but it’s actually picking up steam. It won’t lose steam anytime soon. Every major auto company in the world is pivoting towards electric vehicles, and building out a robust portfolio of EVs. At the same time, nearly every government is also promoting mass adoption of EVs. Consumer awareness and fondness of these vehicles are also growing.

In a nutshell, EVs are the future, and there’s no stopping this future.

EVs presently represent around 3% of the 70 million annual global passenger vehicle  registrations. By 2030, that share could easily climb to 30%, on slightly higher global-vehicle volume, given urbanization trends. If that occurs, global EV delivery volumes could reach roughly 25 million by 2030.

That represents a more than twelve-fold increase from 2018’s 2 million EV deliveries.


The Second Big Idea: Tesla’s Leadership

The second big idea is that TSLA is leading this EV revolution through unprecedented innovation in the EV space and product expansion.

A few years ago, Tesla had one niche, very expensive EV that was a sports-car lookalike: the Model S. Today, TSLA has the Model S, the Model X, the Model 3, and the Model Y, four electric vehicles which are very different and together appeal to many different types of buyers. In other words, Tesla has gone from a one-trick pony, to a maker of multiple types of high-demand EVs.

Naturally, this innovation and product expansion have led to market-share gains for TSLA. According to InsideEVs, TSLA has gone from under 15% plug-in-vehicle market share in the U.S. in 2014 to over 50% market share in 2018.

This expansion should continue for the foreseeable future. Tesla just unveiled the Model Y, an EV crossover which further expands Tesla’s EV product portfolio and addressable market. The competition will eventually catch up with TSLA, and its market-share expansion will stop. But the company’s robust track record of market-share expansion implies that TSLA will forever remain a relevant and very important player in the soon-to-be-huge global EV market.

That market will one day reach 25 million annual deliveries. If Tesla has market share of just 10%, that means it will make 2.5 million deliveries annually. Assuming a $50,000 average price tag, 25% gross margins, and a 10% operating-spending rate, that implies $10 billion-plus in potential net profits. Based on a price-earnings multiple of 20 for Tesla stock, that equates to a long term market cap for Tesla stock of $200 billion-plus.

TSLA currently has a market cap of under $50 billion. Thus, Tesla stock has tremendous long-term potential.

The Bottom Line on Tesla Stock

The two big ideas and trends supporting Tesla’s long-term growth outlook remain healthy. As long as they remain healthy, most other near-term headwinds that the company is facing are just noise. If this noise leads to downturns of Tesla stock (which is occurring right now), then that’s a buying opportunity. As a result I’m buying TSLA stock on this recent dip.

As of this writing, Luke Lango was long Tesla stock.

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