Five or six years ago, Tesla was in a life or death situation. Fast forward today and the company has consistent free cash flows and industry-leading margins. But, Tesla’s stock price performance has stalled in the past three years. In this article, I will look at upcoming tailwinds that can help Tesla stock.

Related: Why Tesla Stock Can Go Down to $100 in 2024

Tesla’s Growing Cash Pile

Before I begin, it is worth pointing out that Tesla has been free cash flow positive for the past 5 years. This has changed its narrative in a big way.

Now, Tesla can self-sufficiently fund its capital expenditures with operating cash flows. Moreoever, the company sits on a big pile of cash, which stands at a staggering $26.9 billion as of March 31, 2024. Tesla earned a whopping $1.1 billion in interest income on its short-term investments in 2023. With that much dry powder, Tesla can undertake many projects and fly through any slowdown in EV demand.

Tesla Stock Catalyst #1: Lithium Refining

The first near-term catalyst is not the Cybertruck. Actually, it is Tesla’s lithium refinery in Corpus Christi, Texas. The factory should reach full production of battery-grade lithium hydroxide in 2025. The expected capacity is 50GWh/year. This production volume can support up to 1 million EV passenger cars. In comparison, Tesla produced 1.8 million cars in 2023. So, this refinery can support roughly 50% of the current production volume.

Why is this important? It is important because refined lithium is the biggest chokepoint in EV production. Mining lithium is not a problem. The mineral is widely available with most of proven deposits in Chile and Australia. But, refining lithium into a battery-grade chemical (lithium carbonate or lithium hydroxide) is a different matter. The process is much more involved and costly. China controls 70% of lithium refining and many EV makers rely on Chinese companies.

Here is what Musk had to say about this:

“So, it is basically like minting money right now. There is like software margins in lithium processing right now. So, I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can’t lose. It’s licensed to print money.” (Q2 2022 Tesla Earnings Call)

Because of constrained supply, Tesla decided to enter lithium refining on its own. Such a step will allow Tesla to ramp up its production faster. Later, they can expand their lithium refining capacity even further if it turns out a success. Of course, it is not clear if refining is going to cost more or less compared to buying from third parties. But, most likely, Musk and his team made a calculated step that took costs and benefits into account.

The Effect of Lithium Refining on Financials

How will refining lithium affect Tesla’s financial performance? In many ways. First, Tesla can increase car production faster, so more sales. But, if the technology saves money, the company may generate higher profits. Or, they can pass through their savings to consumers by lowering car prices instead. Likely this is what will happen. While margins may not get a huge bump, higher sales volumes may make up for it.

Moreover, there is another benefit. If there are trade disputes between China and the US, Tesla will have its own supply of refined lithium. So, there is also a security advantage in going this direction.

Tesla Stock Catalyst #2: 4680 Battery

The second bullish development for Tesla is its own 4680 batteries. Almost all car makers in the US and around the world rely on foreign companies to supply battery cells for them. So, it is impressive that Tesla figured out its own competitive design of EV batteries. Moreover, 4680 batteries may cost less, have higher driving range, charge faster and be safer. The batteries are already in a production ramp in Texas.

Financial Impact of 4680 Battery

What kind of impact will the 4680 batteries have on financials? First, Tesla can improve its profitability through potential cost savings. Although it takes a lot of investment, the company may save margin that it pays to its cell suppliers such as CATL. Also, its own supply of batteries will allow it to ramp up production and increase sales faster.

Moreover, the 4680 batteries can be used in many other products, not only passenger cars. These include semi trucks and energy storage solutions, such as Megapacks and Powerwall. This could be the reason why Tesla did not branch out into other product lines before, such as trucks or buses. Battery cell availability constrained them. So, they had to choose where to put their efforts.

Asked he was asked why Tesla was not producing other car models, here is what Elon Musk said:

“Well, it doesn’t really help if all you’re doing is shuffling around the batteries from one car to another. In fact, it hurts because you add complexity, but you don’t add incremental volume. So, it’s sort of pointless, in fact, like counterproductive to add model complexity without solving the availability of lithium-ion batteries.”

I think Musk is on to something here with this vertical integration. It allows Tesla to shed dependence on others and not to be volume constrained. As of now, the ramp of 4680 batteries is not visible in its financials. But, its own battery and in-house lithium refining may allow Tesla to see big payoffs within 2-3 years.

Tesla Stock Catalyst #3: Next Generation Platform + $25K Crossover Car

The other positive factor is Tesla’s next generation platform. The company will use it to produce the new inexpensive cars costing around $25K. The new platform will take advantage of everything Tesla learned before and more.

Tesla is known for its car manufacturing innovations. These include single-unit castings and 48-volt architecture. Such innovations allowed Tesla to reduce its robotic, human and factory footprint. For instance, producing vehicles in 2022 required 70% less welding robots than in 2016. This is a massive improvement. Of course, the farther we go, the rate of improvement may slow down.

So, the next generation platform may be another leap forward. Tesla achieves its cost reductions through better tech and economies of scale. While achieving economies of scale is often a function of production volume, tech is what matters most.

How Will the Next Generation Platform Affect Tesla?

While details are scarce, here is what to know about the next generation platform. First, car powertrains will not use rare earth materials without performance compromises. This is important because rare earth minerals are very expensive. Moreover, Chinese companies control over 60% of rare earth refining. China used export quotas for rare earth minerals before, causing supply shortages and price spikes.

Second, Tesla will use the so-called unboxed process in its next generation platform. The unboxed process uses subassembly lines that run in parallel. Then, workers and robots put everything together into a finished products at the end at a faster rate.

This is important because of substantial cost savings. In the past, Tesla achieved a 50% cost reduction from its platform iterations. Here is a graph showing the cost of goods sold per unit.

It was over $84K in 2017. Fast forward to 2023 and this number stands at around $36K in Q4 2023. Tesla is aiming for another 50% cost reduction and they may be able to achieve it. Such production improvements can carry over to other products, such as the Cybertruck and Tesla Semi.

The financial effect could be profound, especially on profit margins. Tesla can either capture these savings with higher margins or lower its prices depending on competition. This will make its cars more affordable and competitive.

Tesla Stock Catalyst #4: Tesla Semi

Another tailwind is the upcoming production ramp in Gigafactory Nevada for Tesla Semi trucks. The company is aiming for 50K production of Semis in North America in the next several years. Semis have their own demand from industrial and retail companies. Tesla has already delivered a few of these trucks in December 2022 to PepsiCo.

Here is what to know about Tesla Semi trucks. The semi should be 3x more powerful than a diesel truck with a range of 500 miles on an even surface with a full load. Of course, charging these trucks along the route will remain an issue for some time. So, at the beginning, application of Semi trucks will be somewhat limited in nature. As for the price, the semi will cost from $150K to $250K depending on specs.

The jury is still out on the value of Tesla Semis. They may or may not have a lower cost of ownership compared to diesel trucks. Things will depend on battery performance, electricity cost and repairs. For now it seems that the drive to go green is what compels companies to buy into EV Semi trucks. Judging from Tesla’s passenger cars, the Tesla Semi could at least match diesel trucks. This is especially true if the cost of batteries comes down. Again, the jury is still out.

For now, there are likely few of them on the road. Tesla has been testing grounds with pilot programs. Once they get real-life data, they will likely ramp up their production in the next several years.

Tesla Stock Catalyst #5: Energy Storage

The final near-term bullish factor is the takeoff of Tesla’s energy storage business. Tesla produces Megapacks that utility and industrial clients buy for energy storage. These Megapacks are about the size of a cargo container and can store over 3 megawatt hours of energy.

This can be enough to power 3,600 homes for an hour according to Tesla. Tesla’s storage solutions also include smaller Powerwalls for home use too. Tesla delivered 14.7 gigawatt hours of batteries in 2023. That was a massive 125% growth in comparison to 6.5 gigawatt hours a year before.

Here is what Elon Musk had to say about this:

“…we’ll continue to see very strong growth in storage, as predicted. I said for many years that the storage business would grow much faster than the car business, and it is doing that.”

Financial Impact of Tesla’s Energy Storage Solutions

This energy storage revenues grew from $3.9B in 2022 to $6B in 2023. The gross margin improved substantially too from 7% to almost 19% in 2023. So, this line of business not only grew, but also contributed $1.1B in gross profit.

To put things in perspective, $1.1B accounted for 6% of Tesla’s total gross profits. This may not seem like much. But, if the sales of Megapacks scale up, the margin contribution can increase. Of course, these revenues are lumpy. In other words, some years may not see much, while others will produce large growth.

As of now, Tesla is using primarily battery cells from Chinese CATL for its Megapacks. This adds extra cost and lowers its margin. Elon Musk said that Tesla plans to incorporate 4680 batteries into Megapacks at some point. If 4680 batteries turn out to be cheaper, Tesla can improve its margins even further.

Honorable Mention: Opening Up Supercharging Network

There is another honorable mention. Tesla announced that its supercharging network will be open to non-Tesla cars in 2024.

The company may generate revenues in the realm of $10 to $20 billion by 2030. This is according to forecasts from Dan Ives of Wedbush Securities.

According to Mr. Ives, these numbers will represent 3% to 6% of Tesla’s total revenue by that time. I have not seen his calculations and it is difficult to comment on this. But, at the end of the day what matters is margin, not revenue. Who cares if they break even and earn zero? My take is that Tesla will not earn excess profits on its supercharging network. This is so because other companies are in the charging business too. So, competition is going to be high.

There is likely another reason behind Tesla’s opening its superchargers. And, that is to increase the appeal of EV adoption among consumers. Maybe, Tesla can earn some economic profits from superchargers, but likely not much in my opinion.

Tesla’s Moonshots

So, those were the near-term catalysts. What about Tesla’s moonshots? There are a few. It could be the main reason why the stock market prices Tesla as a software company not a car maker. These moonshots are high risk, high reward projects. They can either flop or cause explosion in Tesla’s valuation in the future. Probably, a very distant future.

1. FSD and Robotaxi

The first moonshot is the full-self driving (FSD) software. The goal is to achieve level 5 autonomous driving. Once level 5 is achieved, Elon Musk envisions many uses for this software. First, consumers will want to license FSD to let it drive for them. Second, FSD can transform any car into a robotaxi that will drive around and earn money for its owners.  Finally, Tesla can license FSD technology to other car makers and earn money that way.

Of course, there are many hurdles to this moonshot. For starters, Tesla needs to get its FSD approved by regulatory authorities. For now, this has been a challenge. Finally, the question is at what point does FSD becomes reliable and safe? Musk calls it a march of nines, meaning what level of reliability FSD needs to achieve to be safe. Is it 99.99% or 99.9999%?

2. Optimus Robot

The second moonshot is the robot called Optimus. Tesla unveiled it in 2021 and there was some progress since then. Optimus is a general-purpose robot that Tesla will likely use in its own factories first. The robot will replace humans for repetitive and mundane. Later, Musk envisions that Optimus can replace humans entirely for certain industrial tasks.

Imagine a future where robots produce robots and do much of manufacturing and more. It may sound far-fetched and perhaps funny, but it looks more possible than ever. Many other companies are moving in that direction with robots. Take Amazon, for instance. Amazon is already using automated machines for hauling tasks in its warehouses. For now, most of these robots look like boxes on wheels with limited limb capacity.

BMW Sees Benefit in Using Humanoid Robots Too

But, consider this. In 2024, BMW signed an agreement with the company you may never heard of called Figure AI. Like Tesla, Figure AI develops humanoid robots, which it will provide to BMW’s plant in South Carolina. At first, these robots will perform specialized tasks. Later, BMW may expand their use further.

So, as we see, even other car makers see potential in humanoid robots today, not some distant future. This attests to the amount of progress that has been made in the last five or so years. The advantage of humanoid robots is that they can perform a much wider range of tasks. So their application can be not only in car making, but general purpose manufacturing too.

This was possible thanks to progress in AI software and AI training infrastructure. And, we are getting close to humanoid robots that can even self-correct. Elon Musk once said that Optimus “has the potential to be more significant than [Tesla’s] vehicle business over time.” The potential for Optimus is really large if we think about it. First, Tesla will be able to use it in its own manufacturing, slashing costs by a wide margin. Second, it could produce and sell them to other companies too.

3. Dojo Supercomputer

The third moonshot is Dojo. It’s an in-house supercomputer Tesla developed for AI video processing and object recognition. The core of Dojo is the D1 chip that is a general-purpose CPU. Its main purpose is to train Tesla’s FSD software. But, it can also be used for Optimus robot. According to Elon Musk, cars are just robots on 4 wheels. So, the application concept for Optimus would be the same.

Of course, Nvidia is the king when it comes to GPU chips to train AI algorithm. Still, Tesla hopes that Dojo will not only operate as fast, but be energy efficient and cost less. After all, Nvidia has a gross profit margin of over 70%, which is what its customers pay. So, the cost savings could be large. Moreover, Tesla can even sell or license Dojo computing power to others.

Of course, this a high uncertainty project as Elon Musk acknowledged himself many times. It remains a pure speculation and a money-burning pit. In the meantime, Tesla continues relying on Nvidia chips to train its FSD algorithm.

Investor Takeaways

In conclusion, Tesla continues chugging along as an EV car maker. But, the stock market prices Tesla as a technology company for many reasons as we saw.

Many other companies such as Google or Amazon also started with only one line of business. It was digital advertising or bookselling at first. But, they faced their own internal problems and developed their own solutions. For example, take Amazon’s AWS. Later, they realized that others also need these solutions and the rest is history.

Or, take Nvidia, for instance. It started as a pure play on GPUs for gaming. Later, these chips found their their use to train AI algorithms. This was known for perhaps 10 years. But, the adoption rate did not explode until 2022-2023. Certain tech needs time to get to a certain level of development and usefulness before it takes off. But, once it takes off, the stock market repricing turns dramatic, taking everyone by surprise.

Related: Why Tesla Stock Can Go Down to $100 in 2024?

The same applies to Tesla. It could well be like Apple or Amazon in their early stages. Tesla will likely still be in the EV business 10 or 20 years from now. But, its moonshots such as FSD, Dojo and Optimus can overtake everything else. Of course, this is not guaranteed, but possible.