Is it worth investing in Tesla right now?

It has been a rocky year for Tesla Motors. The world’s most valuable carmaker saw its profits fall in the first two quarters, but it is on the front foot again. Car sales were up 2 per cent to surpass $20 billion in the three months ended in September, and overall profit rose by 17 per cent to $2.2 billion. Its shares shot up 19 per cent in early trading on Thursday, though it meant the stock was only back to roughly where it started the year.
But sales growth is headed in the right direction again, profit margins are widening and investors are now eyeing up Tesla’s next new project: the robotaxi, an autonomous car with no steering wheel or pedals.
Yet much of the extraordinary premium on Tesla shares comes from outside its core business of selling cars.By some estimates, most of its $764 billion market capitalisation rests not on its electric vehicles, but its ability to deliver on its robotics, artificial intelligence as well as its energy storage and generation businesses.
Car sales were up 2 per cent in the third quarter to just over $20 billion, helped by a much better performance in China where the company has been struggling against cheaper domestic rivals such as BYD Auto. Quarterly revenue from sales of automotive regulatory credits was its second highest ever, at $890 million. These credits are sold to other automakers, who buy them to meet emissions requirements. They are, in effect, pure profit for Tesla.
But arguably most exciting for shareholders was a marked improvement in profit margins. Tesla recorded its lowest cost per vehicle ever at about $35,100, which helped its operating profit margin hit 10.8 per cent. The Cybertruck, Tesla’s electric pick-up, which had been losing money since its launch last November, also achieved a positive gross margin for the first time.
Elon Musk, Tesla’s chief executive, has not set a specific sales increase target this year, but said this week the company could achieve somewhere between 20 to 30 per cent in vehicle growth in 2025. That would mark a serious improvement compared with this year, with deliveries down roughly 6 per cent over the first three quarters of 2024.
That is despite the fact that the company appears to have abandoned its plans for a long-awaited $25,000 electric car. Tesla said it would instead release cheaper versions of its existing models that will be priced below $30,000 after subsidies: these are slated to arrive in the first half of 2025.
Musk is trying to convince investors to view Tesla not as a traditional car company, but as an AI and analytics business. He is certainly putting his money where his mouth is: the company plans to spend more than $10 billion this year as it grows its data centres.
Earlier this month Musk unveiled two fully autonomous cars: the Cybercab, a gold two-seater with butterfly wing doors but no steering wheel or pedals, and the Robovan, a 20-seater minibus cum van. He has said that the Cybercab could be available for less than $30,000, with production expected to start by 2027.
There has been plenty of hype around these new cars, but investors are approaching them with a healthy dose of scepticism. In fact, the day after Tesla staged its “We, Robot” event, its shares fell because the market felt the company had failed to provide enough detail or a comprehensive go-to-market strategy for this new product. Even with some extra titbits from bosses this week, there is still limited information on how they will roll out to the public.
Nevertheless, the most bullish of investors think Tesla’s robotaxi could be transformational for its investment case. Musk thinks Tesla could offer robotaxi rides for 30 to 40 cents per mile to the customer. Some bullish analysts believe this could fall to 25 cents per mile at scale, compared with around the $2 mark paid in western markets for the likes of Uber, and, importantly, below the 70 cents to $1 range that it costs to drive a personal car.
Next year Tesla is also expected to release a fully autonomous version of its driver-assistance software, a feature that it calls “full self-driving” or FSD. The plan is to initially release the software on a test fleet of vehicles before allowing the wider Tesla user base to download it onto their cars.
But Tesla is far from the only company trying to capture the autonomous vehicle market. It is up against Waymo, Amazon’s self-driving business Zoox and Cruise, the autonomous ride-hailing service made by the US auto giant General Motors.
There are also multiple regulators that could stand in the way of mass autonomous ride-hailing. While data so far suggests that self-driving cars are usually safer than having a human behind the wheel, Tesla is facing investigations by federal car safety regulators in the US after its software was linked to several crashes.
Fortunately there are other divisions driving growth. The energy generation and storage business, launched in 2015, is the fastest growing part of Tesla. It sells both residential and utility-scale battery products, with the latter helping grids to store large amounts of energy that is later deployed at peak usage times. Tesla expects this division to grow by at least 75 per cent in 2024, largely driven by demand for its larger Megapack battery. It achieved a record gross margin of 20.5 per cent in the third quarter.
Musk has driven much of Tesla’s success, and his huge $56 billion pay package triggered controversy earlier this year. But if he ever left the company, there is no telling how shareholders would react.
That is not to say that having Musk at the top does not come with its own complications. The Tesla boss certainly does not shy away from social or political issues: he has been a strong advocate for Donald Trump in the run-up to the US presidential election, appearing regularly on the campaign trail. This may prove to be divisive for Tesla’s American customers.
Still, for now, investors are willing to cough up for Musk’s magic touch — the shares trade at a price to earnings to growth (PEG) ratio of 6.7, placing it well above the rest of the so-called “Magnificent Seven” group of star tech stocks and certainly beyond any other traditional carmaker. While Tesla lays the groundwork for growth in exciting new markets over the next decade, progress — especially in autonomous vehicles — is likely to be slow and not linear.
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