Tesla (TSLA -2.08%) investors have had much to smile about in 2023. Shares of the electric vehicle (EV) company are up by a whopping 83% year to date despite rising competition as more automakers join the fast-growing opportunity. Let's discuss why the company's competitive advantages can help it continue outperforming over the long term.
The electric vehicle opportunity is epic
Analysts at Bloomberg project that more than half of all vehicles sold in the U.S. by 2030 will be electric, thanks in part to government support for the industry and improving battery and charging technologies. And despite the rising competition, Tesla still looks like the best way for investors to bet on this transformational opportunity.
While automakers like Ford, General Motors, and Toyota enjoy substantial brand recognition and distribution networks from their internal combustion engine (ICE) businesses, they will cannibalize their existing lineups with electrified alternatives, leading to lower net growth.
On the other hand, as a pure-play automaker, Tesla won't cannibalize an existing business, which could lead to a relatively higher market share when the dust settles. This key advantage could help Tesla reach CEO Elon Musk's goal of becoming the world's largest automaker, producing 20 million cars annually (up from 1.37 million in 2022).
Tesla's size protects it from the competition
While Tesla has a clear advantage over its self-cannibalizing competitors, its scale and cash flow also give it an edge over smaller pure-play EV companies like Lucid or Rivian, which also run fully electric product lines. Unlike these loss-making companies, Tesla boasted an operating income of roughly $13.7 billion in 2022. This means it isn't totally reliant on raising high-interest debt or selling additional shares to fund its operations.
Image source: Getty Images.
Higher margins can translate to pricing power, which will become increasingly important as EV industry competition intensifies. According to a January Reuters report, Tesla slashed its prices by 20% globally, upping pressure on its cash-burning rivals. This probably isn't a temporary tactic. Management claims the company will be able to cut assembly costs by half through innovative manufacturing techniques. And if even a fraction of these cost savings is passed on to consumers, lower-margin rivals may be squeezed out of the industry.
Tesla's financial muscle can also help it scale up faster. Recently, the company announced plans for an additional Gigafactory in Mexico expected to cost as much as $10 billion to complete. And it plans to release its Cybertruck by the end of 2023. Differentiated by its eye-catching design, the new vehicle could finally give Tesla a foothold in the pickup truck market, helping it keep up the pressure on rivals like Rivian and Ford Motor, which specialize in the space.
The valuation is still reasonable
With a forward P/E of 52, Tesla stock is significantly more expensive than the S&P 500's average of 22. But the valuation looks reasonable considering its rapid growth rate and compelling advantages over both its large-cap and small-cap rivals. The company enjoys an excellent combination of scale and growth potential, which makes it a top pick for investors who want to bet on the EV industry.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
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