Tesla: The Thesis Is Stronger Than Ever (NASDAQ:TSLA)

Non-Linearity

I often share that business is non-linear, in the sense that no company on earth will grow sales at a steady 15% or 25% annually in perpetuity. Especially for companies that generate tens of billions in sales, as is the case for Tesla, Inc. (NASDAQ:TSLA), we should expect periods in which sales growth declines, accelerates meaningfully, and everything in between.

For Tesla specifically, it is undoubtedly going through a period of non-linearity presently, as most clearly communicated by its recent 8.5% decline in overall sales, which followed a year of steadily declining sales growth rate.

Tesla’s Quarterly Sales Growth Rate For The Last Ten Years

In late 2020 and 2021, the oft-sung refrain from Tesla bulls, of which I am one today to be sure, was that 50% annualized revenue growth should be expected in the years ahead. My belief was that the law of large numbers would prevent this from happening, as Tesla had achieved almost inconceivably large scale by 2020.

Moreover, the specter of rates rising, and the associated economic slowing, was something I believed could derail this 50% growth rate that market participants believed was attainable.

My perspective, in these respects, has, as of today, been vindicated.

Today, we’re now in the thick of non-linearity, so to speak, in which Tesla is now actually experiencing negative growth, due in part to abutting the law of large numbers and, arguably more importantly, due to rates having risen at such a precipitous rate lately.

Interest Rates Have Risen Rapidly, Making Vehicles More Expensive To Purchase, Slowing Vehicle Sales

As you know, cars are often financed, so higher rates have a significant impact on both Tesla sales, and vehicle sales broadly.

This dynamic, in my estimation, has resulted in the slowing of EV adoption that we’ve witnessed recently, which can be seen in the chart below.

The EV Adoption Curve Has Flattened As Rates Have Risen

Quite notably, it’s not just Tesla that has seen slowing sales. I believe this is crucial to contextualize Tesla’s present growth rate and experience as a corporate entity broadly.

From Ford (F), which has experienced truly catastrophic slowing of its EV sales, to BYD Company (OTCPK:BYDDF), all EV OEMs have experienced slower or outright declining growth of EV sales, as the charts below depict.

Ford EV Sales Collapse In Grand Fashion

BYD Sales Decline Year Over Year

In short, higher rates have largely been the cause of Tesla’s sales stagnation, and I do not believe it should be cause for panic as it relates to the long-term thesis for the business.

There was, as we all have seen, the EV adoption rate globally is under pressure and a lot of other auto manufacturers are pulling back on EVs and pursuing plug-in hybrids instead. We believe this is not the right strategy and electric vehicles will ultimately dominate the market.

Elon Musk, CEO, Q1 2024 Tesla Earnings Call (emphasis added).

Tesla’s EV Deliveries On A Trailing Twelve Month Basis

I believe it’s likely that Tesla’s vehicle sales, as measured by the delivery metrics presented above, will continue to grow, though I’ve always been incredulous about the 20M annual delivery metric the company and investors have bandied about. That said, as you will find in the material I will share in the concluding thoughts of this note, I do not believe in any sense that Tesla needs to achieve 20M annual deliveries for the investment to be a successful investment from its current enterprise value/stock price and for the thesis broadly to play out.

Speaking of the Tesla thesis, let’s now turn to a consideration of the overarching thesis for the business. As I’ve noted to you recently during this period of the stock declining, I believe we should lean on the principal pillars for the thesis that I have delineated for you in recent quarters. They are as follows:

• Tesla’s EV sales have been under pressure lately, but this is largely attributable to the rate at which interest rates have risen, which has put downward pressure on the entire EV industry’s growth. Tesla EV sales should continue to grow in the future, as the world achieves closer to 100% adoption of EVs, eliminating the use of ICEs (internal combustion engines) in the process. We’re currently at just 12% of total car sales annually that are EVs.
• As we approach 100% adoption of EVs, the conduit through which energy is delivered for transportation will shift away from gas stations and to the electrical grid, where EV owners will re-fuel vehicles from an outlet in their garage. This will create massive demand for energy through the electrical grid, which will create the need for more stationary storage, i.e., Tesla Megapack, which is a product within Tesla’s energy business. Tesla has stated that it plans to deploy 1,500 GWh of stationary storage per year…