For most of the 2010s, Tesla (NASDAQ:TSLA) has been one of the market‚Äôs most polarizing battleground stocks. But, over the past year, this bull versus bear debate has become increasingly one-sided, as TSLA stock has soared more than 800% on the back of record demand, record deliveries, record revenues and record profits.
Have the bulls won?
By now, it should be abundantly clear that Tesla is the future of transportation, for two simple reasons. One, electric vehicles will reach global ubiquity within the next two decades. Two, Tesla is miles ahead of everyone else when it comes to making the best EVs.
Still, one could very reasonably argue that Tesla ‚ÄĒ with a $400 billion market cap that is more than 13X Ford‚Äės (NYSE:F) market capitalization ‚ÄĒ is already fully priced to take over the global transportation market.
But it‚Äôs not fully priced for the company to also take over the global energy market ‚ÄĒ and make no mistake, Tesla will do just that with its solar panels, Megapack and Powerwall solutions over the next two decades, too.
So how big could Tesla get as the world‚Äôs most dominant auto and energy company? My numbers say a trillion dollar valuation is likely within the next few years, and that TSLA stock will soar well above $1,000.
Needless to say, that means long-term investors should stick with TSLA stock.
Here‚Äôs a deeper look.
Electric Vehicles are the Future
There will be no greater disruption in the 2020s than the electrification of automobile transportation.
Clearly, the shift towards EV has already started. It will only accelerate in the 2020s.
Demand is shifting, as over 80% of prospective car buyers today want an EV. Laws are shifting, as California just banned the sale of gas cars post-2035. Technology is improving, with the average range of an EV has increasing by 140% since 2011. Costs are falling, with average EV prices having dropped 70% since 2010. Supply is pivoting, as every auto maker in the world is making an all-out blitz into the EV category.
Perhaps most importantly, the need is also only getting bigger. Global warming isn‚Äôt going away anytime soon. Gas cars still emit tons of greenhouse gases. We need to reverse that path ‚ÄĒ and we will, because the economics and technology behind EVs are now good enough to make mass adoption feasible.
The future couldn‚Äôt be any clearer.
EVs are on the cusp of disrupting the multi-trillion-dollar auto market, and over the next two decades, will become globally ubiquitous.
In numbers, the global auto market will likely march higher towards 80 million annual sales by 2035, thanks to population growth and urbanization. Given current trends, I think 50% EV penetration globally is totally feasible by then, implying about 40 million EV deliveries by 2035 ‚ÄĒ up almost 20X from 2019‚Äôs base.
Tesla will dominate that 40 million EV market, which means nothing but good things for TSLA stock going forward.
Tesla Is Number 1 in EVs
When it comes to making and selling EVs, Tesla is the best in the game ‚ÄĒ and there‚Äôs no competition.
Tesla‚Äôs cars are the best performing EVs in the market, mostly thanks to Tesla‚Äôs unrivaled lead in EV battery technology (Tesla‚Äôs four EV models are also the four longest-range EVs in the market today, while they also feature the fastest recharge times, the most horsepower, the fastest top speeds and the quickest 0-to-60 times).
The company is selling those cars at market-low prices (the Model 3 retails for less than $40,000), and will continue to lead in bringing down battery costs, and therefore, bringing down EV retail prices (management is promising a $25,000 EV in the not-too-distant future). Tesla also has unchallenged production capability to meet surging demand (the company has built / is building EV gigafactories in North America, Asia and Europe).
Not to mention, the company has the best brand in the auto market, with Tesla‚Äôs brand popularity continuing to surge among consumers.
All in all, when its comes to making and selling EVs, Tesla is top dog. That‚Äôs why the company, by my numbers, controls about 17% of the global EV market today.
I suspect Tesla will be able to leverage its technology, production and branding advantages to largely sustain ~15% EV market share for the foreseeable future, despite rising competition (mostly because those competitors can‚Äôt really ‚Äúcompete‚ÄĚ with Tesla at scale). In an EV market that will measure 40 million deliveries in 2035, that implies 6 million annual deliveries for Tesla.
At an average sales prices of $30,000, that implies $180 billion in auto revenues for Tesla by 2030.
That‚Äôs a big number. But, as stated earlier, it‚Äôs really just the tip of the iceberg when it comes to TSLA stock‚Äôs long-term growth narrative.
Clean Energy Is Also the Future
Everyone thinks of TSLA as an auto company. It is. But it‚Äôs also an energy company. And therefore, just as critical to the TSLA stock bull thesis as the electric vehicle wave, is the broader clean energy wave.
Make no mistake. Just as the electric vehicle wave has arrived and will lead to enormous disruption over the next two decades, the clean energy wave has similarly arrived and will enormously disrupt incumbent energy markets over the next two decades ‚ÄĒ and, yes, Tesla will be at the heart of this disruptive megatrend, too.
Back in 2000, renewable energy ‚ÄĒ like solar, wind and hydroelectric ‚ÄĒ accounted for just¬†9% of U.S. electricity generation. That share rose to 17% in 2019, and is on track to eclipse 20% within the next few years. This huge growth has been driven by three things:
- Increasing government support.¬†The U.S. government has handed out tax credits for the deployment of wind and solar energy in order to promote clean energy adoption, while certain governments ‚ÄĒ like California ‚ÄĒ are requiring that all new homes be¬†built with solar panels.
- Shifting consumer demand.¬†A new generation of consumers, increasingly aware of the impacts of global warming, are increasingly considering clean energy sources. More than¬†half of U.S. homeowners¬†have either already installed or are seriously considering installing solar panels.
- Falling renewables energy cost.¬†Thanks to technological improvements, efficiency enhancements and economies of scale, the cost to install solar has¬†dropped more than 70%¬†over the last decade ‚ÄĒ and increasingly, we are starting to see renewables energy reach grid parity with fossil fuels in terms of production and installation cost.
None of these trends are going to reverse course.
Pro-green legislature ‚ÄĒ like the stuff you are seeing in California ‚ÄĒ will become the norm across the U.S. over the next few years. Consumers will increasingly demand clean energy sources as they look to combat climate change. And continued technological improvements coupled with increased scale will drive renewables energy costs lower, and lower, and lower.
Big picture: The Clean Energy revolution has arrived, and it‚Äôs going to dramatically change our world (for the better) over the next decade. By 2035, we will be living in a world powered by solar and wind ‚ÄĒ and in order to get there, annual solar energy investment needs to grow by 68% to ~$200 billion per year.
But the sun doesn‚Äôt always shine. And the wind doesn‚Äôt always blow. So critical to the mass deployment of solar and wind power over the next two decades will be the mass deployment of advanced battery storage technology to store excess solar and wind power. That‚Äôs why the global battery storage market is expected to increase by ~10X from 2019 ($59 billion) to 2035 ($546 billion).
So, between solar energy production and battery storage, Tesla‚Äôs addressable market for its energy business is marching towards $750+ billion. The company should be able to capture a significant share of that, implying enormous upside potential left for TSLA stock.
Tesla Will Be Number 1 in Clean Energy, Too
Tesla has visibility to dominating the clean energy market at scale, much as the company is dominating the electric vehicle market today.
On the solar side, there‚Äôs really one factor that matters above all else, and that‚Äôs cost. On the cost front, Tesla dominates the competition. Tesla Solar is the lowest cost solar in the United States, with solar prices that (post Federal Tax Credit) hover around $1.49 per watt, which is 30% cheaper than the U.S. average.
Meanwhile, on the battery storage front, the underlying battery chemistry behind making powerful batteries for electric vehicles is very similar to the chemistry behind making powerful batteries for storage. That‚Äôs why Tesla today has market-leading solutions for commercial battery storage (the Megapack) and personal/residential battery storage (the Powerwall). It‚Äôs also why Tesla should be able to dominate the battery storage market at scale, because the company will continue to have an unrivaled lead in battery technology.
Plus, Tesla has a branding advantage here. The company is already well recognized by consumers as a trusted name in clean energy through its best-in-breed electric vehicles. Given that strong reputation, it‚Äôs quite likely that consumers will trust Tesla most when choosing solar panels and/or residential battery storage.
Thus, in the long run, Tesla projects as the world‚Äôs dominant solar energy and battery storage provider.
How much of this combined $750 billion market can Tesla grab by 2030?
By my calculations, 25% share seems totally doable, implying $187.5 billion in Tesla Energy revenues by 2035. If Tesla Energy does get that big, then there is huge upside potential in TSLA stock over the next 10 to 15 years.
A Trillion-Dollar Company in the Making
Between its auto and energy businesses, Tesla is a trillion dollar company in the making.
The math here is simple.
By 2035, revenues will measure somewhere around $400 billion, with $180 billion coming from auto, $187.5 billion coming from energy, and the rest coming from related services. Gross margins should hover above 25%, while the opex rate should fall with scale towards the high single-digit range, implying a company-wide operating margin of ~20%.
That implies operating profits of $80 billion. After taking out interest and taxes, that could easily flow into $65 billion in net profits.
The market‚Äôs historically average forward price-to-earnings ratio is 17. Based on that multiple, Tesla will be worth more than a trillion dollars by the 2030s.
Considering Tesla is worth $400 billion today, the investment implication here is clear. TSLA stock should remain a core long-term holding for any and all investors with a multi-year time horizon.
Bottom Line on TSLA Stock
Ignore the bears.
Tesla stock is a long-term winner. And considering the company‚Äôs leadership position in the burgeoning electric vehicle and clean energy markets, TSLA stock is not overvalued today.
So, long-term investors should stick with this stock. It represents the market‚Äôs most compelling play on the future of transportation and energy.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.¬†
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