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It's been a pretty challenging year for Tesla (NASDAQ:TSLA). The company's shares are down 16% as of writing, partly due to a mixed performance in its electric vehicle (EV) business. However, Tesla recently reported great news on that front: The company's third-quarter EV deliveries came in well ahead of Wall Street estimates. Tesla's shares climbed on the news. Should you jump on the bandwagon and invest in the company right now?
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Several developments have had a positive impact on Tesla's EV business this year. For instance, geopolitical tensions have led to rising energy prices, boosting demand for EVs. Tesla's second-quarter deliveries grew 25% year over year to 480,126 -- its largest year-over-year growth rate in about two years -- likely partly due to higher oil prices.
That tailwind doesn't appear to be over yet, as evidenced by the company's recent reveal of its third-quarter deliveries. Tesla's deliveries for the period totaled 486,532. That was down about 2% from the year-ago period, but it came in well ahead of the consensus estimate of around 461,974. That's great news for the company, but how long will the tailwind last?
Tesla helped pioneer EVs, and this segment will likely remain its most important sales channel for the next few years. However, the company's prospects are increasingly tied to other initiatives, especially its robotaxi business. Note that Tesla is currently trading at 158.7x forward earnings.
This valuation largely reflects the potential of Tesla's robotaxis, which it first launched last year in Austin. It has expanded its fleet to more cities this year, and the company recently introduced the Cybercab, a vehicle specifically designed for its robotaxi segment (it previously used its Model Y).
The Cybercab has no steering wheel, no mirrors, and no pedals. It is likely cheaper to manufacture at scale than Tesla's main models. Let's put some (hypothetical) numbers on Tesla's robotaxi fleet to understand why the market is valuing the company so highly. Suppose that within five years, the company has a million robotaxis on the road, most of which are Cybercabs.
Assume significant utilization as well -- say 10 rides per day, on average, for each car, at an average price of $20 per ride. That's $200 per day per vehicle, or $73,000 per year. For the entire fleet, that will be $73 billion. Of course, there will be some maintenance (and other) expenses -- but the economics of Tesla's robotaxi business could end up being much more profitable than EV sales.
That's because instead of selling a car once and generating only little revenue afterward from $99 per month Full Self-Driving subscriptions -- as it currently does with its consumer market models -- the company could earn tens of thousands of dollars per Cybercab every year over each vehicle's entire useful life, potentially resulting in much higher profits and margins.
That's why, despite Tesla's recent strong performance in its core EV business, investors should continue to pay close attention to the progress of its robotaxi segment. And there has been some news on that front. After launching the Cybercab in Austin in early September, the company's fleet has grown from 45 to over 150.
At that pace, and assuming Tesla can launch the Cybercab elsewhere and attract significant business, the company's robotaxi business could start meaningfully contributing to its financial results within a few years.
That said, there are some risks to consider. The Cybercab was the subject of a federal safety investigation shortly after it hit the roads. There could be more regulatory hiccups along the way. Tesla will also have to attract people willing to use its self-driving vehicles regularly.
Many consumers may be hesitant to do so for a variety of reasons, including risk-related ones. Also, Tesla will face stiff competition in this market. Waymo, which Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) owns, currently has a larger fleet and the backing of a cash-rich corporation, so it can afford to operate at a loss. Meanwhile, Tesla's valuation already seems to factor in significant success from Tesla's robotaxi project.
All that said, Tesla is a fairly risky stock. The company could deliver outstanding returns over the medium term if it can exceed market expectations for its robotaxi ambitions, but the stock could also lag broader equities -- and either way, it will be a volatile ride. Invest accordingly.
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Prosper Junior Bakiny has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.
Tesla's Third-Quarter Deliveries Beat Expectations. Time to Buy the Stock? was originally published by The Motley Fool
