3 Reasons For Long-Term Investors to Buy Tesla (And 1 Why You Shouldn’t)

Tesla’s  (TSLA) - Get Free Report stock has enjoyed a renaissance. After falling sharply in 2022, the company’s shares rebounded in 2023, more than doubling from their lows in early January. The company is one of the largest technology companies in the world, but it’s also one of the most polarizing because of its controversial CEO Elon Musk.

Musk tends to make headlines with off-the-cuff opinions, but he’s also demonstrated a penchant for sky-high projections that have been hard for Tesla to deliver. As a result, Tesla’s shares have been volatile enough that some investors have likely stayed on the sidelines.

If you’re considering investing in Tesla’s stock, here are a few reasons why owning shares could make a lot of sense and one reason why buying now could be a mistake.

Tesla is Only Scratching the Surface of the EV Market

Tesla has already established itself as the market leader in electric vehicles. In 2022, it delivered 1.31 million cars, up 40% from 2021. That’s a remarkable figure considering the number of EVs sold by its rivals in Detroit. For perspective, Ford  (F) - Get Free Report, the second largest EV player in the U.S., only sold 61,575 electric vehicles in 2022. General Motors  (GM) - Get Free Report, the largest U.S. automaker, only sold 39,096. To say that Tesla is the market share leader is a bit of an understatement.

The good news for investors is that Tesla’s only scratching the surface. EVs are winning converts, yet they remain a small proportion of total vehicle sales. In 2022, 13.75 million light vehicles were sold in the United States, and 67.2 million automobiles were sold worldwide.

Electric vehicles represented only about 14% of all vehicles sold globally, according to the International Energy Agency. For perspective, electric vehicles accounted for just 4% of total vehicle sales as recently as 2020.

EV sales have been growing faster than the industry, a trend likely to continue. The IEA expects 14 million EVs to be sold worldwide this year, up 35% from last year. However, the auto industry is only likely to experience modest growth. For example, Cox Automotive predicts U.S. unit sales of 14.2 million, that’s only about 3% year-over-year growth.

Given that the U.S. electric vehicle market will benefit from greater tax credits due to the Inflation Reduction Act of 2022, total demand should be a big tailwind for Tesla. The company sold nearly 423,000 vehicles in the first quarter, with projections for total sales of 1.8 million vehicles this year.

Tesla’s Product Line is Expanding 

Unlike EV rival, Rivian  (RIVN) - Get Free Report, Tesla’s had a big missing link in its auto lineup: It doesn’t yet sell a pickup truck. However, that’s expected to change soon. The company’s long-awaited Cybertruck, will begin rolling off assembly lines this fall. When it does, Tesla has a shot at tapping into a huge market.

In the U.S., full-size truck sales totaled nearly 2 million in 2022, providing a big lift in sales for Ford and General Motors. General Motors sold 754,876 full-sized trucks last year, while Ford sold 653,957 trucks. Toss in light trucks, and the opportunity for Cybertruck is even more significant. Last year, 10.9 million light trucks were sold in America, according to Statista.

Trucks don’t just add to total unit sales; they’re also a key cog in automakers’ profitability.

A Morgan Stanley study in 2020 reportedly found that truck sales accounted for most of Ford and General Motors’ revenues and profits. Specifically, Silverado and Sierra were the big needle-movers for GM, while the F-series trucks were the driving force behind Ford’s financials. Five vehicles, including the Silverado and Sierra, accounted for 80% of GM's earnings before interest and taxes (EBIT).

Last year, RBC and Morgan Stanley pegged Ford’s profit per truck or SUV at $14,000 per vehicle. If accurate, the launch of the Cybertruck could provide a big boost to both Tesla’s top and bottom lines.

The first Cybertrucks are expected to trickle out of manufacturing plants in August, with official production beginning by October, according to Electrek. How many Cybertrucks might Tesla sell? Electrek reports Tesla asked suppliers to be ready for 375,000 per year. For perspective, it sold 759,000 Model Y crossover SUVs last year.

Tesla Has Options 

Ark Invest’s Cathie Wood has caught a lot of flak for seemingly sky-high projections related to the potential use of Tesla vehicles as a taxi service. Earlier this year, projections for at least $200 billion in robotaxi revenue in 2027 prompted Ark Invest to slap a $2,000 price target on Tesla’s shares.

Those projections are arguably too optimistic, but even if a fraction of their forecast for robotaxi’s proves correct, it could be enough to reward investors significantly. And suppose the projections fail to materialize on Cathie Wood's timeline. In that case, Tesla still has a treasure trove of valuable data it’s collecting on autonomous driving that it can leverage. It also can generate substantial add-on revenue by cross-selling services to its customers, most of whom exhibit an Apple-like loyalty to the car company.

Tesla also has other valuable assets, including one of the nation’s largest solar companies and Megapack's emerging battery storage solution for utilities. Heck, it’s even experimenting with a humanoid robot it calls Optimus. Who knows if these shots on goal pan out, but a few potential catalysts could reward investors in the future, including its fully electric semi-truck.

Tesla’s Stock Faces One Big Hurdle

The potential for gains makes Tesla an intriguing stock to own, but shares have always been considered pricey — and that remains true today.

The company’s enjoyed significant earnings per share growth in the past three years, but the recent rebound in its stock price means that Tesla’s valuation has surged.

Analysts expect Tesla will deliver EPS of $3.35 this year and $4.82 next year. Based on those estimates, Tesla’s P/E ratio is 70 and 49 at today's share price, respectively. That’s not cheap, particularly compared to other automakers.

For example, Ford and GM have accelerated their EV plans to protect their market share. Ford launched the F-150 Lightning with plans to boost production to 150,000 units annually. Meanwhile, GM offers an electric Hummer and an electric Silverado with a market-leading battery range that is fast approaching. Investors are only paying less than 8 times and 5 times 2024 earnings estimates to own shares of those companies, respectively.

Forget Tesla – We’re all-in on this EV stock

A premium valuation isn’t abnormal for fast-growing companies, and Tesla is undoubtedly growing more quickly than legacy rivals. However, nobody is going to mistake this stock for a value play. As a result, those worried about valuation should look elsewhere, particularly given Tesla’s shares are notoriously prone to pops and drops large enough to give risk-averse investors heart palpitations.