Could This Be Tesla’s Next Big Catalyst?

Could This Be Tesla’s Next Big Catalyst?

Elon Musk Tesla

  • The growth stock’s premium valuation demands exceptional execution from the company.
  • A new factory and lower-priced car in India could be the incremental catalyst Tesla needs.
  • On the other hand, Tesla shares may have already priced in events like this.

This could be almost as big a deal as the Cybertruck.

No wonder Tesla (TSLA 3.20%) shares have rallied sharply this year. The company is giving investors many reasons to be upbeat. Not only did Tesla report a staggering second-quarter year-over-year growth rate for vehicle deliveries of 83%, but management has also been telling investors that it expects deliveries of its long-awaited Cybertruck to start this year. This momentum in vehicle deliveries and Tesla’s exciting product plans are key reasons for the stock’s more than doubling this year.

Now Tesla is giving investors yet another reason to remain optimistic. The company is reportedly planning to open a high-volume production factory in India, according to The Times of India. Citing “government sources,” the news website said on Thursday that Tesla CEO Elon Musk has been having discussions with the Indian government about a proposal to build a factory there to support production of a new, lower-cost vehicle in the country. A new factory and a new, lower-cost product could be what Tesla needs to help the growth stock live up to its pricey valuation.

Ambitious plans in India

Specifically, The Times of India said its source believes the company is looking to build a factory that can build around 500,000 units per year. The vehicle it plans to build, the sources say, would have a starting price of around $24,000 in India. This compares to a starting price for the Model 3 of about $40,000.

The lower price point would dramatically expand Tesla’s addressable market by making its vehicles more affordable for the masses.

For some context on how significantly the factory could increase sales once it is at full production, Tesla finished the first quarter with installed tooling for production capacity of up to 2 million units per year. This new factory, therefore, would add 25% more to Tesla’s annual production capacity.

Even more, a vehicle at this price point could solicit demand far over 500,000 units per year. So, if things go well with the potential vehicle, Tesla could eventually expand production capacity at the factory in a different market based on what it learns in India from producing the new electric car.

Don’t get too excited

While it’s good to hear reports of another potential Tesla factory and a possible new car that is significantly cheaper, investors should keep in mind that the automaker’s stock already prices in rapid expansion in production capacity and delivery volume growth over the coming years.

Driving home just how high investors’ expectations are, Tesla stock trades at more than 80 times earnings as of this writing, even though earnings per share are expected to decline this year due to recent vehicle price reductions. A valuation like this suggests investors expect continued strong growth in delivery volume to help earnings growth eventually resume and to then grow at robust double-digit rates for years to come. Further, to live up to the stock’s high price tag, Tesla will need to pull this off even as competition intensifies; virtually every major auto manufacturer has ambitious plans to expand production of electric vehicles.

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