Tesla (TSLA.US) is undoubtedly one of the best investments you've owned in the last decade. Since July 2013, the stock is up approximately 3,150%, boosting the performance of the entire Nasdaq index as well. Even in 2023, the stock is up a whopping 121% as investors are leaning towards this electric vehicle (EV) manufacturer.
Competitive advantages
Warren Buffett, considered by many to be the best investor of all time, tries to identify companies that have competitive advantages. These are the attributes that allow a company to compete with its rivals and perform better financially. Tesla has two main factors in its favor.
To start with, the company has built a strong luxury brand in the automotive industry. An impressive 60% of electric cars sold in the US are Tesla models. And according to Brand Finance, the Tesla brand has an estimated value of $66 billion, more than any other competitor.
Just look at the company's gross margin of 28.5% on its cars sold in 2022. Customers are clearly willing to pay a premium for what they consider a premium product. Offering some of the longest ranges among EVs, as well as great features such as free upgrades.
Tesla also benefits from economies of scale. Between 2017 and 2022, Tesla's car sales grew 691% to a total of $67.2 billion. Last year, the company produced 1.4 million vehicles, while shipping 1.3 million. That's massive scale. The advantage for a company like Tesla, which has significant fixed costs, especially when it comes to manufacturing plants, is that it can better leverage those operating costs into revenue growth.
Traditional car companies, such as Ford and General Motors , are investing heavily in their own electric vehicle capabilities. But since they don't sell nearly as many units as Tesla, those EV segments are losing money. It's anyone's guess as to when, if ever, they will become profitable like Tesla.
Is it worth investing in Tesla?
The company's head start and leadership advantage over the major automotive OEMs has resulted in a strong luxury brand known for innovation and elegant design.
According to the US newspaper The New York Times, Tesla plans to double the production capacity of its assembly plant near Berlin to one million vehicles a year. This would make the plant the largest car factory in Europe.
If the expansion receives approval from local officials, the plant's production will surpass that of Volkswagen's historic Wolfsburg factory. Built in the 1930s, it is capable of producing 815,000 vehicles a year and remains the largest in Europe.
What did the economic results for the second quarter of 2023 reveal?
Tesla's Q2 earnings results showed a 20% increase in revenue and a 47% increase in sales. However, gross margins were lower than expected at 18.2%. In order to increase market share and volume, CEO Elon Musk plans to aggressively cut prices, even if it means accepting margin hits. Tesla is also expanding its assembly plant outside Berlin to become Europe's largest carmaker. Despite these plans, investors are worried about sacrificing current profitability for autonomous driving technology and potential production cuts in Q3.
