Tesla: Amid unprecedented volatility, focus on long-term drivers (NASDAQ:TSLA)

Tesla, Inc. (NASDAQ:TSLA) has never been a sleepy population. The world's leading electric vehicle (“EV”) manufacturer has always been a lightning rod for the press, with the most recent buzz coming next June. 13 votes in favor of CEO Elon Musk's proposed $56 billion compensation package, where rejection This package is expected to cause a drop in Tesla's stock prices.

But when we speculate on the outcome of shorter-term drivers, we lose sight of the true fundamental progress Tesla is making, even amid a difficult operating environment. With the stock still down nearly 30% so far this year, I still see an opportunity for investors to load up here, especially if the vote goes badly.

The last time I wrote a bullish article on Tesla was earlier this year, in January, when the Shares were still trading closer to $200 per share. At the time, he had argued that Tesla's price declines – while certainly a drag on gross margins and profitability in the near term – would make the company more attractive against other electric and hybrid vehicle makers, whose popularity has resurfaced this year. anus.

Now, with Tesla stock still below where it was at the beginning of the year, I'm renewing my buy call Tesla and furthermore there are a few more positive green light catalysts to bank on for the company.

Bottom line: Tesla has long been a volatile stock, especially around key milestones like earnings, production updates and eye-catching shareholder votes. But as a long-time believer in electric vehicle adoption and Tesla's technological and brand advantage in the space, I stand firm.

Stabilization of gross margin, with greater advantages derived from greater adoption of FSD

Over the last year there has been a lot of talk about Tesla's price cuts. The company has cut prices, sometimes multiple times in the same quarter, which always provokes a backlash from investors (especially to price cuts made in China, where the company competes with much cheaper local alternatives).

But amid this round of price cuts, we saw in Tesla's first-quarter results that the company achieved a sequential stabilization of gross margin.

First-quarter gross margins of 17.4% fell 2 points year-over-year, compared to an eight-point year-over-year decline in the fourth quarter, and also fell just 20 basis points sequentially from the fourth quarter.

We note that there are a number of positive factors for a gross margin recovery, in addition to vehicle production efficiencies, which will naturally occur over time. It's worth recognizing that Tesla has recently started free self-driving (“FSD”) trials for buyers of new Teslas, as well as existing Tesla owners. from Marchto encourage greater adoption of the $8,000 feature.

Equally worth noting is the fact that in several markets, FSD is now available as a $99/month subscription, which is a substantially lower barrier to entry than an $8,000 sticker price. We, as consumers, have now been trained by the subscription model, and many major purchases (including and especially smartphones) have also moved to a monthly payments model.

In my opinion, the launch of both free trials and subscription pricing will increase Tesla's FSD fixing rates on new vehicles, which is essentially a “free” lever for gross margin leverage.

Accelerated timeline for next-generation vehicles

In my opinion, Tesla is also not getting enough credit for expectations regarding the timing of the launch of its lower-priced next-generation vehicles. We now know that Tesla believes it is between two major phases of growth, the second of which will be unleashed when cheaper cars become available on the market.

As seen in the company's anecdotal outlook commentary above, the company notes that it hopes to begin production of these new vehicles in early 2025. It's also important to note that Tesla has existing installed capacity to increase vehicle volume by at least 50% above 2023 levels when these new vehicles come online before investing in new manufacturing lines. So right now, the gross margins that we're seeing have built-in idle costs that are reserved for these new vehicles.

According to Elon Musk's roadmap commentary on the first quarter earnings call:

We also continued to expand our AI training capacity in the first quarter, more than doubling our training count sequentially. In terms of the new product roadmap, there has been a lot of talk about our next line of vehicles in the coming weeks. We have updated our future vehicle lineup to accelerate the launch of new models in the future; We previously mentioned initial production in the second half of 2025, so we expect it to be more like early 2025, if not later this year. These new vehicles, including more affordable models, will use aspects of the next-generation platform, as well as aspects of our current platforms, and will be able to be produced on the same manufacturing lines as our current vehicle lineup. Therefore, it does not depend on any new factory or new mass production line. It will be manufactured on our current production lines much more efficiently. And we believe this should allow us to reach over 3 million vehicle capacity when fully realized.”

Valuation metrics still look reasonable, especially with a number of upside margin catalysts still on the horizon.

If we judge Tesla by its short-term earnings metrics, many may consider the stock to be expensive compared to the broader market, but in a longer-term context, I think Tesla is actually trading at reasonable levels even against lagging metrics.

With current share prices hovering around $175, Tesla trades with a market capitalization of $552.4 billion, and when we offset the substantial $24 billion of net cash on Tesla's most recent balance sheet ($26.9 billion of cash, offset by a relatively lower $2.9 billion in outstanding debt), its resulting The value of the company is 528.4 billion dollars.

As shown in the chart below, Tesla's TTM Adjusted EBITDA is $15.7 billion. In contrast, Tesla is trading at Adjusted EBITDA 33.6x EV/TTM.

We could argue that Tesla is at a low point in terms of profitability, having just gone through a round of price cuts. We have already discussed the potential for greater adoption of FSD (from subscriptions and free trials) to increase gross margins. Beyond a recovery in sales, another fundamental lever for the expansion of profitability is the company's recent decision to fire 10% of your template. These measures are expected to generate at least $1 billion in annualized savings.

Key takeaways

Amid the near-term volatility, I continue to see a number of positive catalysts for Tesla, including and especially an accelerated roadmap for next-generation vehicles. Take advantage of this year's stock decline to build a long-term position here.