Last week, Elon Musk made a bizarre but possibly brilliant move for Tesla (NASDAQ: TSLA) stock.
He said the company was going to focus on reducing profit.
This strange line of thinking is about the long term. He wants to keep slashing the price of the firm’s cars – meaning less profit – to gain market share.
On the back of the news, the Tesla share price dropped 12% in just a day.
With that drop, I can now buy shares for a total 59% discount from their all-time high.
This could be a brilliant buying opportunity if I thought Musk’s strategy would pay off.
Incredible margins and 42% growth
Let’s start with Tesla’s biggest advantage. The company makes much more profit on its cars than its competitors do on theirs.
The Texas-based carmaker has unrivalled vertical integration. It makes the batteries, the self-driving software, the charging stations and so on.
This leads to net margins its rivals can’t match.
| Tesla | Toyota | Honda | GM | Ford | Stellantis | |
| 2022 Net Margin | 15.5% | 6.9% | 4.80% | 6.20% | -1.4% | 9.2% |
These margins meant the firm reached record net income of $12.6bn and free cash flow of $7.5bn in 2022.
The company is raking in cash thanks to a 42% annual growth rate in revenue over the last five years.
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
| Revenue | $7.0bn | $11.8bn | $21.5bn | $24.6bn | $31.5bn | $53.8bn | $81.5bn |
| Free cash flow | ($1.6bn) | ($0.2bn) | $1.0bn | $2.7bn | $3.5bn | $7.6bn | $5.8bn |
| Net income | ($0.8bn) | ($2.2bn) | ($1.1bn) | ($0.8bn) | $0.7bn | $5.5bn | $12.6bn |
All this means Tesla has the cash reserves to make price cuts its rivals can’t keep up with. That gives it a great chance to dominate the electric vehicle (EV) market.
“Tremendous” future profits
The plan here is not simply to only sell the most electric vehicles.
Musk wants to go one step further by becoming the market leader in autonomous driving vehicles. Cars that drive themselves, basically.
He thinks this is possible because no other company has the same “strategic advantage”.
“We’re the only ones making cars that technically could sell for zero profits now and yield tremendous profits in future through autonomy,” he said.
Tesla has already captured 65% of the EV market.
And if the firm could become the market leader in self-driving “robotaxis”? I can see that share price ripping way higher.
Cheap at $165?
Despite those massive profits and a share price down 59%, Tesla isn’t a cheap company to buy into.
A single share in the company would set me back $165.
That share price means a price-to-earnings ratio of around 48, which looks high compared to other carmakers.
But Tesla is the only one growing revenues at 40% per year. If that continues, the price looks reasonable to me.
| Tesla | Toyota | Honda | GM | Ford | Stellantis | |
| P/E Ratio | 47.8 | 10.0 | 6.2 | 5.1 | -32.7 | 2.9 |
This is the biggest risk though. I have to ask myself if I’m willing to buy into this expensive stock while Musk is looking to make less money on its cars.
That said, sometimes one has to pay over the odds to buy into a fantastic company.
As Warren Buffett said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If I had £1,000
All in all, I can’t deny Musk and Tesla’s incredible vision.
If the world starts using ‘robotaxis’ to get around, I’d be thrilled to buy in at today’s price.
If I had a spare £1,000, I think I’d put some of it into the EV company.
