Shares of Tesla (TSLA 0.23%) took a huge hit on Thursday, following the electric-car maker's second-quarter earnings report. Investors may be spooked by the company's narrowing profit margin and management's scant details on expected production volumes of the company's long-awaited Cybertruck, which Tesla has said will launch this year.
Given the growth stock's approximate 10% pullback on Thursday, shareholders may wonder whether the decline is a sign of worse things to come or if Wall Street is overlooking the stock's long-term potential. While both the bull and bear cases for the stock are convincing these days, the quarterly report importantly draws attention to one thing that helps strengthen the bull case: Tesla is getting an extraordinary number of vehicles on the road, despite an incredibly tough macroeconomic environment for auto sales.
Silencing the doubters
Investors will always find a way to criticize Tesla (or really any company they want to look for flaws in). But there's one area it has arguably exceeded virtually every critic's expectations in recent years: sales growth.
Rewind to the end of 2020, when the automaker delivered about 500,000 vehicles and net income for the full year was $903 million. Few would have guessed that by the second quarter of 2023, Tesla would be delivering nearly half a million vehicles quarterly.
Yet Tesla's doing almost exactly that. Second-quarter deliveries came in at about 466,000. Even more, net income came in at $2.7 billion for the three months, dwarfing Tesla's annual income just a few years ago.
Sure, we could dwell on the fact that Tesla had to significantly reduce the prices of its vehicles this year to aid its sales growth in the face of rising interest rates. But when investors zoom out a few years, it's easier to appreciate the magic of what the company has done.
In Tesla's 2020 fourth-quarter letter to shareholders, management said it expected to grow deliveries over "a multi-year horizon" by an average annual growth rate of 50%. Now Tesla can reflect on this bold prediction with pride. Even more, pulling off this growth helps make the company's forecast for more of the same in the coming years more believable.
"We are planning to grow production as quickly as possible in alignment with the 50% [compound annual growth rate, or CAGR] target we began guiding to in early 2021," Tesla said in its second-quarter 2023 investor update. "In some years we may grow faster and some we may grow slower, depending on a number of factors."
Tesla made sure to note that it's ahead of its long-term 50% CAGR forecast for now.
More deliveries equal more software revenue
Price cuts or not, Tesla will likely be putting millions of cars on the road per year next year. Further, these vehicles could generate significant revenue for Tesla over their lifetime via software sales and subscriptions for the company's driver-assist technology. Finally, Tesla can potentially make even more money from its driver-assist software as it works toward solving autonomous driving.
While much speculation is still required to justify Tesla stock's current price, its sales momentum in such a difficult environment is jaw-dropping.
