Summary
Tesla, Inc. stock ended 2024 with a 62% gain, driven by improving fundamentals and Trump's election victory.
Tesla's growth prospects in 2025 look promising with new affordable models, FSD advancements, and expanding Energy business.
Management expects 20% to 30% vehicle growth in 2025, Cybercab volume production in 2026, and mass Optimus distribution by 2027 — yes, these are moonshot goals.
As ridiculous as it sounds, TSLA management's overambitious targets are what makes Tesla the company it is today — and inevitably the company it will be in the future.
Waxing Gibbous Moon
Introduction
2024 was a roller coaster ride for Tesla, Inc. (NASDAQ:TSLA) investors. The stock started off poorly in the first half of the year, down nearly 50% at one point. Fortunately, the stock redeemed itself in the second half of the year, recouping all its losses and blasting past to new all-time highs, ultimately ending 2024 with a cool 62% gain.
This was primarily driven by several factors, including Tesla’s strong Q3 results and Donald Trump’s election victory.
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Now, at more than $1.3T in Market Cap, some might argue that Tesla stock may be trading at overvalued territories.
However, as I’ll briefly outline in this article, I believe Tesla stock has a good chance of delivering positive returns in 2025. Sure, the stock will continue to be volatile. That’s a given.
However, management appears more optimistic this year than last year. They have ambitious targets for 2025, and even if they fall short of expectations, I think it’ll be good enough to make a positive difference.
Growth: Even If Musk Misses…
A major reason to be bullish on Tesla is that the company is returning to growth mode.
The second half of 2023 and the first half of 2024 were challenging times for Tesla. The company dealt with high interest rates and tough YoY comps, which brought growth to a standstill.
As you can see below, Tesla saw Revenue growth rates decelerating meaningfully in 2023, then falling to negative in the first quarter of 2024. However, growth rates have recently reaccelerated, pointing to a recovery in demand and a continuation of business expansion.
In Q3, Tesla recorded $25.2B of Revenue, up 8% YoY.
Tesla Revenue
The Automotive segment, which accounts for 80% of the company’s Revenue, grew by 2% YoY in Q3, to produce $20.0B of Automotive Revenue. At first glance, this pace of growth might look downright disappointing by Tesla standards, but consider that this is a major improvement from Q1’s decline of (13)% and Q2’s decline of (7)%, so this trend is particularly encouraging to see.
Tesla Automotive Revenue
The slight increase in Automotive Revenue was driven by a 6% YoY increase in Total Deliveries, to 463K in Q3. Model 3/Y Deliveries grew 5% YoY to 440K while Other Models Deliveries ramped up by 43% YoY as Cybertruck became the third best-selling EV in Q3 in the US.
If you haven’t noticed, Automotive Revenue grew 4pp slower than Deliveries. This was largely due to lower Average Selling Prices.
Tesla Deliveries and Production
Tesla has also released Q4 KPIs:
Total Production of 459K, down 7% YoY. I think management wants to ship out older inventory in preparation for the launch of “more affordable models starting in the first half of 2025”. On the other hand, lower production volumes may also mean that Tesla anticipates lower demand in the near term.
This can be seen from Total Deliveries of 496K, up just 2% YoY, which is below consensus estimates of 507K. Considering lower ASPs, it is likely that Automotive Revenue growth will turn negative again in Q4. That said, this brings 2024 Total Deliveries to 1,789K, down slightly from 1,809K in 2023. Management previously expected “to achieve slight growth in vehicle deliveries in 2024,” so falling short of their guidance means that the demand landscape may not look so good after all. On another note, this could also mean that some buyers are staying on the sidelines, waiting for the newer, cheaper models to drop.
During the Q3 earnings call, CEO Elon Musk mentioned that he expects a 20% to 30% vehicle growth in 2025, bolstered by their new, lower-cost models. Considering Tesla’s weak Q4 production and delivery numbers, this growth rate now seems like a long shot to me.
Notwithstanding negative external events, like if there are some force majeure events, like some big war breaks out or interest rates go sky high or something like that, then we can't overcome massive force majeure events. But I think with our lower-cost vehicles with the advent of autonomy something like a 20% to 30% growth next year is my best guess.
(CEO Elon Musk — Telsa FY2024 Q3 Earnings Call).
Automotive sales aside, Tesla is doing exceptionally well in other areas of its business.
For one, Services and Other Revenue grew to a record $2.8B in Q3, up 29% YoY, with growth accelerating 8pp QoQ. Its Supercharger network continues to expand with Stations and Connectors up 20% YoY and 22% YoY, respectively.
Tesla Services and Other Revenue
Its Energy business continues to see strong demand as well. In Q3, Energy Generation and Storage Revenue was $2.4B, up 52% YoY. Storage deployed was 6.9GWh in Q3, up 75% YoY.
Tesla Energy Revenue
Powerwall 3 achieved record deployments in Q3 for the second straight quarter — and looks like it’s going to be another record quarter in Q4. Per management, Storage Deployed in Q4 was 11GWh, which is up a whopping 244% YoY.
Heading into 2025, management has increased production capacity through the ramp of the Lathrop Megafactory and the launch of the Shanghai Megafactory. These should help fulfill its ballooning backlog.
Our pipeline and backlog continue to grow quarter over quarter as we fill our 2025 production slots, and we're doing our little best to keep up with the demand.
(CFO Vaibhav Taneja — Tesla FY2024 Q3 Earnings Call - emphasis added.)
Tesla Storage Deployed
Having said that, we can expect its Energy business to continue its hypergrowth in 2025. More importantly, we can also expect some level of growth for the Automotive business. 20% to 30% volume growth might seem ambitious, but that could be possible if Tesla can get their more affordable cars out the door, which, according to management, remains on track for launch in the first half of 2025.
In addition, Tesla’s full self-drive (“FSD”) technology is getting smarter and more capable by the day, with over 2B cumulative miles driven with FSD as of Q3 and AI training compute up 75% in the quarter. According to Tesla’s Vehicle Safety Report, FSD is also 10x safer than the US average.
The company is also pushing FSD adoption through one-time 30-day free trials. As consumers begin to understand, appreciate, and adopt Tesla’s FSD technology, owning a Tesla vehicle becomes much more attractive. This should not only drive higher deliveries but also higher FSD Revenue recognition.
Tesla FSD and AI Data
Investors can also look forward to the official launch of Tesla's robotaxi service, which could drive monumental, high-margin Revenue at scale. Of course, this will require the approval of full autonomy at the Federal level.
This is where President Donald Trump comes in. Elon Musk’s close relationship with Donald Trump may mean a more favorable regulatory environment as it relates to self-driving technology and the introduction of autonomous ride-hailing services. If this is true, then Tesla’s robotaxi launch could be expedited.
Elon feels “confident” of Cybercab reaching volume production in 2026, so we might see robotaxi launch as early as 2026, if not, 2027.
So just starting production, reaching volume production in ‘26. And that's–that should be substantial. And we're aiming for at least 2 million units a year of Cybercab. That'll be in more than one factory, but I think it's at least 2 million units a year, maybe 4 million ultimately.
(CEO Elon Musk — Tesla FY2024 Q3 Earnings Call)
Tesla Cybercab
Not forgetting to mention, Elon also intends to sell Optimus humanoid robots to consumers beginning in 2026. By 2027, he expects 500K units sold at a price tag of $20K to $25K each. That translates to $10.0B to $12.5B in Optimus Revenue in 2027 alone.
20% to 30% volume growth. FSD approval. 4M Cybercabs. 500K Optimus robots.
Yes. Ambitious. Ridiculous. Insanity.
But get this: Elon has always aimed for the moon — his targets always sound impossible to reach.
And that's okay because even if he misses, he’ll land among the stars.
In other words, Tesla may likely fall short of Elon’s expectations. But at least, it will get Tesla somewhere. At least, it will drive growth. At least, it will continue to cement its position as the leader of “energy, transport, robotics, and AI”.
That’s how Tesla became the company it is today. Without these irrational goals, Tesla wouldn’t be as large or as successful as it is today.
So despite his moonshot goals, I wouldn’t bet against Elon.
Profitability: Cost Advantages Moat At Play
A surprisingly strong area of Tesla's Q3 report was its Gross Margins. In Q3, Gross Profit was $5.0B at a 19.8% Gross Margin, which improved 190bps YoY and 180bps QoQ.
Declining Gross Margin has been a major concern over the past few quarters, and although it is still well below its historical range of 25.0% seen in 2021 and 2022, the recent reversal in Gross Margin trend is a welcome sign of stronger earnings potential in the quarters ahead.
Tesla Gross Profit
That being said, all three segments showed improvements in their unit economics:
Automotive Gross Profit was $4.0B at a 20.1% Margin, which improved 140bps YoY and 160bps QoQ. Despite lower Average Selling Prices, Tesla was able to cut costs at a larger magnitude, leading to higher Automotive Gross Margins. As a matter of fact, the cost of goods sold per vehicle dropped to an all-time low of about $35,100 as its Gigafactories gained economies of scale. Notably, the Cybertruck also achieved positive Gross Margins for the first time. It is worth mentioning that higher FSD Revenue and regulatory credit Revenue also contributed to margin expansion. Despite the positive inflection in Automotive Gross Margin, management mentioned that “sustaining these margins in Q4, however, will be challenging given the current economic environment”, so expect a slight decline in Automotive Gross Margins QoQ.
Energy Gross Profit was $725M at a 30.5% Margin, which expanded about 6pp YoY and QoQ. While this improvement is encouraging to see, management noted: “that there will be fluctuation in margins as we manage through deployments and our inventory.” Regardless, the Energy business is becoming a more profitable part of the ecosystem with each passing quarter, ultimately contributing to robust earnings growth.
Services and Other Gross Profit was $246M, growing 90% YoY. Gross Margin for the segment was 8.8% Margin, up 280bps YoY and 240bps QoQ. This segment should also become more profitable, both on a marginal and absolute basis, as Tesla continues to expand its vehicle fleet and supercharging network.
Tesla Gross Profit by segment
Author's Analysis
Due to strong Gross Profit growth as well as a 6% YoY reduction in Operating Expenses as a result of cost-cutting efforts, Operating Profits grew 54% YoY to $2.7B in Q3.
Operating Margin was 10.8%, improving 320bps YoY and 450bps QoQ. Clearly, Tesla is demonstrating strong operating leverage.
Tesla Operating Profit
So much so that Tesla is back to being the most cost-efficient automaker in the world. As you can see below, Tesla now has the highest Operating Margin in the industry. This is very impressive considering Tesla's ongoing investments in newer models, FSD advancements, Optimus, Dojo, Cybercab, and more.
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Tesla's vertically integrated ecosystem — including hardware, software, and manufacturing — is what bestows the EV juggernaut its cost advantages moats. Coupled with its leadership position in virtually every area it pursues, namely EVs, self-driving technology, and energy generation and storage, there are ample reasons to believe that Tesla will continue to produce outsized profits compared to its smaller, less profitable counterparts.
Yes, margins may decline in the future as Tesla drives down EV prices. However, higher-margin software Revenue should compensate for this margin decline.
All things considered, it is still too early to tell what Tesla's long-term margin profile will look like. What will the margins look like for Tesla's more affordable models? How would the launch of the robotaxi service affect its bottom line? What about Optimus, Dojo, or FSD licensing?
Only time will tell.
But for now, Tesla is the most profitable EV maker in the world with the potential for full-scale autonomy.
If Tesla can't pull it off profitably, I don't think any company can.
Health: Growing Cash Hoard
Its strong balance sheet is also a major reason why Tesla can continue to innovate and grow.
As of Q3, the company has $20.9B of Net Cash and is growing with each passing quarter.
Tesla Net Cash
The sequential increase in Net Cash was driven by Free Cash Flows of $2.7B, representing an FCF Margin of 10.9%. Despite CapEx increasing 55% QoQ to $3.5B, Tesla doubled its FCF sequentially. That said, management now expects at least $11B in CapEx in 2024.
Tesla Free Cash Flow
Its growing cash hoard and improving FCF profile enable Tesla to continue to invest for growth and drive better efficiency “despite sustained macroeconomic headwinds and others pulling back on EV investments.”
To illustrate further, Tesla has the largest Net Cash position among its peer group. For instance, Toyota Motor Corporation (TM), General Motors Company (GM), and Ford Motor Company (F) have Total Debt of $254B, $129B, and $159B, respectively, which are many times larger than their respective cash balance. No wonder these legacy automakers are slow to innovate and grow — they have to settle their debt obligations first.
On the other hand, Chinese-based BYD Company Limited (OTCPK:BYDDY) and European-based Stellantis N.V. (STLA) are faring much better than the legacy automakers. However, their balance sheets are still weaker when compared to Tesla.
Above all, Tesla’s superior balance sheet reinforces its cost advantages moats and its ability to deliver above-average earnings over the long haul.
Tesla vs Peers
Valuation: No Margin of Safety
If it isn’t clear enough for you, Tesla continues to exhibit strong fundamentals despite the tough macro environment. Furthermore, the outlook seems even brighter now with Donald Trump’s re-election, which could benefit Tesla in several ways, including FSD and robotaxi deployment. This is why Tesla stock has rallied aggressively in the last 6 months or so.
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Following the massive rally, Tesla is now a $1.3T company. To put that into perspective, Tesla is now valued more than the next ten biggest auto stocks combined.
Yup. That's huge.
Looking at some valuation metrics, Tesla seems extremely expensive with a:
Price-to-Sales ratio of 15x.
Price-to-Earnings ratio of 113x.
Price-to-FCF ratio of 400x.
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Many investors are concerned that Tesla’s valuation may not be justified given slowing Automotive growth, declining margins, and future uncertainty.
However, it’s also important to note that traditional valuation metrics and models don’t do Tesla justice because the company is entering unchartered waters (robotaxi, humanoid robots, etc.) where the market opportunity is incalculable, and the long-term margin is unpredictable.
In my view, valuing Tesla is a near-impossible task.
That being said, let me attempt to value the company. As you can see below, I have laid out my key assumptions for my DCF model. For my base case, I have assumed:
FY2033 Revenue of $514B, which is about a 20% CAGR. Analysts have an average Revenue estimate of $624B, so my projection is relatively conservative.
FY2033 FCF Margin of 21.1%.
Perpetual Growth Rate of 3.0%.
Discount Rate of 10%.
These assumptions give me a price target of $294 a share, which is about a 30% downside from its current price of $414.
Tesla DCF Price Target
My bull-case price target is about $470, which is a 13% upside from here.
In my opinion, Tesla stock currently reflects a very optimistic future, which makes it particularly vulnerable to sharp downswings, perhaps, if Tesla misses estimates or if the company faces increased regulatory burdens.
I don’t necessarily think the company is overvalued — I just think that there’s a lack of margin of safety to make Tesla an attractive investment vehicle today.
However, if Tesla continues to execute, I think the stock will do well over the long run.
We think what we're doing is the right approach. And, if we execute our objectives, then I think we will. Tesla my prediction is Tesla will become the most valuable company in the world and probably by a long by a long shot.
(CEO Elon Musk — Tesla FY2024 Q3 Earnings Call — emphasis added.)
Risks:
Margin Degradation: Despite sequential improvement, Tesla’s Gross Margin is still in a downward trend. Tesla is getting ready to launch its newer, cheaper models, which could pressure margins moving forward. If the margin decline is not backed by robust sales growth, Tesla stock could rerate lower.
Unfavorable Policies: President Donald Trump will likely impose new tariffs once he takes office, potentially leading to another trade war with China, one of Tesla’s more important markets. Furthermore, Trump is also planning to eliminate the $7,500 tax credit for EV purchases. Such unfavorable policies may dampen Tesla’s sales, resulting in lower top and bottom-line growth.
Busy Musk: Elon is currently heading many projects, likely spreading himself too thin. As a result, Tesla may not get enough of his much-needed time, energy, and attention.
Interest Rates: If interest rates remain higher for longer, Tesla’s growth may continue to be pressured.
Cannibalism: The launch of an autonomous ride-hailing service may cannibalize Tesla EV sales. It's anybody's guess as to how the markets will react to this development.
Thesis
2024 was an inflection year for Tesla — both in terms of its fundamentals and share price.
The company had a rough start to the year as sales declined, but things took a positive turn as growth accelerated and margins improved.
This led to a surge in Tesla stock, further fueled by Donald Trump’s re-election.
Despite the recent rally, there are plenty of positive catalysts for Tesla in 2025 and beyond, including new vehicle models, FSD advancements, as well as robotaxi approval, which could all push the stock higher from here.
Management has laid out ambitious targets — perhaps too ambitious for many to grasp.
But Elon’s tendency to shoot for the moon has inevitably led to Tesla’s growth, to Tesla’s success.
The important thing is that Tesla is heading in the right direction, into a greener future — towards solving autonomy.
He might miss here and there, but in the process, he might land among the stars. Heck, he might land on Mars — figuratively and literally.