As Tesla grapples with the up-and-down EV industry, the company’s future is based on so much more.
Tesla (TSLA -4.24%) has made history in the automotive industry by going against the grain. Back when Tesla launched its first electric vehicle (EV), the company’s vision seemed closer to sci-fi than reality, especially as industry juggernauts continued to focus on highly profitable gas guzzling machines.
Fast forward to today, and Tesla again looks like it’s zigging while others are zagging, but can it make the future of autonomous vehicles, robotics, energy storage, among other things, real enough to reward investors?
Beyond automotive
If you tuned into numerous second-quarter conference calls, you might have found that Tesla talked far less about EVs than many of its competitors. Morgan Stanley analyst Adam Jonas made it even more clear that he believes Tesla is far more than an auto story as he calculated Tesla’s core auto operations to be worth $59 a share, compared to his full Tesla price target of $310.
Image source: Tesla.
Here are a few of the ways Tesla is zigging while others are zagging — which could drive the stock much higher. Let’s start with the simplest of developments, Tesla’s zero-emission vehicle (ZEV) credits.
Zigging with ZEVs
While zero-emission credits have been an afterthought for most investors in recent years, Tesla is quietly poised to thrive from these 100% margin sales. ZEV credit revenue was roughly $2,000 per unit in the second quarter, which was more than 2 times its recent run rate, and that could increase in the near term as larger automakers are pulling back on EV investments in favor of hybrids or traditional combustion engine sales, and could use these credits.
One example is Ford Motor Company entering into agreements to purchase $3.8 billion worth of regulatory compliance credits in North America and Europe. Its fellow Detroit automakers are likely to follow. ZEVs could be a substantial boost for Tesla’s financial results, and Jonas believes the company could account for half of the ZEV sales market.
AI and robotaxi
While Tesla noted it pushed back the unveiling of its robotaxi design from August to October, there’s a strong belief driverless vehicles will one day generate big-time revenue. Tom Narayan, an analyst at RBC Capital Markets, said the robotaxi market may someday be worth $5 trillion. Further, Tesla uses artificial intelligence (AI)-based computing to develop and train its self-driving software and robots it hopes to sell in the future.
Tesla already offers two types of driver assistance software: the standard Autopilot and a more advanced option for $99 per month that is marketed as “full self-driving,” but once they’re more developed, these systems could be a source of huge future profits. Tesla CEO Elon Musk went as far as saying he’ll seek board approval to invest $5 billion in his artificial intelligence start-up, xAI.
If AI, robots, and driverless taxis are too far in the future to move the needle for investors, there’s also the often overlooked energy storage business. Climate change could bring even greater awareness for Tesla’s energy storage division, and Jonas noted, “We see potential for the Tesla Energy business to be worth more than the autos business.”
Is the stock a buy now?
On one hand, Tesla just posted its lowest quarterly profit margin in five years, EV deliveries were down for the second straight quarter, and most of the enthusiasm for Tesla’s growth is from products and services that don’t yet exist, other than energy storage.
On the other hand, investing in Tesla right now could prove a solid entry point with slowing EV sales and weak growth rates baked into industry stock prices. And if you’re buying what Tesla’s selling, figuratively, the company shouldn’t be looked at as an automaker, but a business for the future. Tesla faces incredible challenges developing the future of AI, robotics, and driverless vehicle technology, but for investors willing to accept some risk, Tesla remains a very high-reward long-term stock.