Tesla (NASDAQ: TSLA) has been making headlines again lately. Shareholders recently voted to reinstate CEO Elon Musk’s controversial $44.9 billion pay package after a Delaware judge struck it down. The outcome of that vote has shareholders focused again on Tesla’s future.
Musk recently spoke ambitiously about that future, which he intends to include full self-driving technology (FSD) and humanoid robotics — opportunities he believes are worth trillions of dollars.
As exciting as that sounds, Tesla has struggled recently. Sales of its electric vehicles (EVs) are slumping, and the stock has fallen 55% from its peak.
Investors face the dilemma of balancing Tesla’s current state against its future potential. However, Tesla’s latest bold move in artificial intelligence (AI) is a major step toward that bright future and arguably makes the stock a buy today despite the company’s slowing EV sales.
Play to win, or don’t play at all
Musk said on X that Tesla is building an AI supercluster that, once complete, could be the world’s largest. Musk said Tesla is aiming for a facility that can draw more than 500 megawatts (MW) of power. (Megawatts, of course, are not a direct measure of computing power — but in the case of big data centers, the amount of electricity they can pull is what sets the upper limit on how many processors and machines they can have running simultaneously. And 500 MW would make Tesla’s supercluster one of the world’s biggest data centers, according to a 2024 report from Analytics Vidhya.) Musk says its processing hardware will be split roughly evenly between Tesla’s own AI hardware and third-party chips from Nvidia and others.
Sizing for ~130MW of power & cooling this year, but will increase to >500MW over next 18 months or so.
Aiming for about half Tesla AI hardware, half Nvidia/other.
Play to win or don’t play at all.
— Elon Musk (@elonmusk) June 20, 2024
Musk has made bold claims in the past, especially in terms of the timeline for new product releases. Many releases have taken longer to come to fruition than what he originally anticipated.
Still, building this supercluster makes a lot of sense even if one were to take the above timeline with a grain of salt. Both full self-driving technology and Tesla humanoid robotics will require AI technology to interpret surroundings and react intelligently. Tesla’s FSD technology progressed immensely with version 12, which utilizes neural nets powered by Nvidia hardware versus coded programming.
That shows the impact of having sufficient computing power to undergird these demanding applications. If Tesla is ever to deliver on its FSD and humanoid robotics ambitions, it will need a lot of computing power, so constructing this facility is a significant step in the right direction.
Electric vehicle downcycle
Investors should avoid getting lost in the clouds of potential. The reality is that Tesla’s financial health today depends on it selling EVs, and business isn’t great. Its revenue growth has stalled out despite price cuts that have cut into its profit margins.
TSLA Revenue (TTM) data by YCharts.
Seeing Tesla’s EV sales slide may be unnerving for shareholders, but such periods come with the territory. Tesla, like most cyclical businesses, is sensitive to the economy. Vehicles are big-ticket items that people are less able to spend on when money is tighter. Today, the household savings rate in America is near a decade low, and the Fed’s hikes to the federal funds rate have in turn helped push the interest rate on the average auto loan to 9.5%.
Fortunately, the long-term forecast for EV adoption points to healthy expansion over time. Additionally, Tesla is a financial juggernaut compared to most of its competitors, so a downturn could actually work to its advantage. EV start-up Fisker filed for bankruptcy just days ago. Tesla’s growth may pick up again over time as consumer financials recover. By then, who knows how much these tough times will have weakened competitors.
Buy now, but watch developments closely
Tesla’s EV sales slump doesn’t seem to be of concern to analysts. The consensus estimate is for the company to grow its earnings by an average of 22% over the next three to five years. Tesla is notoriously polarizing, but buying the stock likely means you believe that Musk will continue creating value for shareholders. After all, the stock has obliterated the broader market since the company went public back in 2008.
It’s hard to call Tesla “cheap” trading at more than 74 times its estimated 2024 earnings, but cyclical stocks always look expensive during the falling parts of their cycles. Even with its volatile past, the reality is that this stock rarely drops more than 50% from its high.
Investors who believe in Tesla’s capacity for innovation and its ability to monetize it should consider buying shares today. Its progress with AI and its supercluster plans could easily get Wall Street back on board even as its EV business slumps. That said, don’t be reckless. Consider building your position using a dollar-cost averaging strategy. You’ll be glad you bought some now if shares snap back sooner, but you’ll still be in a position to add to your stake at better prices if Tesla’s EV slump continues to drag on shares.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Tesla. The Motley Fool has a disclosure policy.
