Tesla's (TSLA +0.69%) shares have performed well over the past two years, significantly outpacing broader equities. That's a bit odd considering the company's deliveries of electric vehicles (EVs) have declined in each of its two most recent fiscal years. The company's revenue and net income have also been unimpressive over this period. Can the carmaker boost its EV business and improve its financial results? Recent reports of one of Tesla's projects could eventually allow it to do that. Let's look into it.
Image source: The Motley Fool.
Tesla's plans to supercharge its business
Tesla is rumored to be working on a brand-new and cheaper EV model. It's important to highlight that these plans are apparently still in the early stages, and production hasn't officially started. However, according to reports, the company will first launch this model in the Chinese market before expanding to other regions. Here's why this could be a game changer for Tesla.
The company is facing increased competition. Domestically, it will soon have to contend with Rivian's R2 -- which was set to start shipping to customers in the second quarter -- and will compete with the Model Y, Tesla's most popular EV (and also the single best-selling vehicle in the world, even including non-EVs). Meanwhile, Tesla has been outpaced by the Chinese EV maker, BYD Company.
Part of BYD's appeal is that it offers more EV options, including some for price-conscious customers. Tesla launching a cheaper car could help it wrestle back some market share in China and perhaps attract a far larger pool of consumers worldwide. This is important considering the company's long-term strategy. While vehicle sales make up most of the company's revenue, it's not a particularly high-margin business, and it can be unpredictable from one year to the next.
A larger installed base will help boost the company's higher-margin recurring revenue from FSD (fully self-driving) subscriptions. An increasing number of cars on the road also gives Tesla access to more real-world data to improve its FSD system. So, offering cheaper cars could have a positive ripple effect on the business.
NASDAQ: TSLA
Key Data Points
Tesla's future isn't just about its EVs. The company is increasingly shifting toward developing its humanoid robot, Optimus. That's partly why Tesla decided to discontinue its Model S and Model X and repurpose space in its Fremont factory in California to building its robots. The AI robotics market could represent a massive opportunity, one that Tesla is well-positioned to capitalize on.
Does all of this make the stock a buy? My view is that Tesla's shares are risky. The stock is trading at levels that seem to already factor in a good outcome for its humanoid robot project, given its forward price-to-earnings of 172.4. Meanwhile, although a cheaper EV could help it bounce back in its core market, it hasn't even started production yet, while competitors continue to make aggressive plans to steal some market share.
Lastly, the company will still face a range of potential headwinds. Investors should particularly monitor legal and regulatory risks that have already affected the business. Long-term investors who can tolerate significant volatility might want to consider Tesla. Others should stay away.
