Better Buy: Tesla shares or a Nasdaq index fund? | Smart Change: Personal Finance

(Mark blank)

After Tesla‘S (NASDAQ: TSLA) recent 3-for-1 stock split, you may be wondering if now is the ideal time to buy Elon Musk’s dynamic electric vehicle (EV) company.

The split was not beneficial for the stock; its price has dropped by almost 10% since it went into effect.

But that decline likely has more to do with the broader market sell-off as concerns over prolonged inflation continue to punish equities.

Long-term investors understand that falling stock prices create potential buying opportunities. So with the heavy technician Nasdaq composite even down more than 10% in recent weeks, what’s the best opportunity right now: Tesla or a Nasdaq index fund?

If you are an investor with a strong stomach for volatility, I believe Tesla offers greater potential due to its many similarities to other one-time stocks.

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Image source: Getty Images.

Unmatched efficiency

Many of today’s largest companies have one thing in common: they turn traditional business models upside down.

Tesla has done this in many ways, but none are more evident than its manufacturing efficiency. This was largely achieved by Musk’s first principles approach to building his cars.

Atomic habits author James Clear defines first principle thinking as “… the act of reducing a process to the core parts that you know to be true and build from there.”

The average automobile is made up of around 30,000 parts. In contrast, the Tesla Model 3 is made up of around 10,000 parts, and the drivetrain has only 17 to 18 individual parts compared to a standard internal combustion engine, which has around 200 parts.

Tesla was able to achieve this production efficiency thanks to its Giga Press, a large-scale die casting machine. Instead of casting thousands of individual parts and welding or gluing them together, the Giga Press can produce large portions of the car in a single cast.

For example, the entire rear section of the Model Y is cast in a single mold, which would traditionally consist of over 70 individually manufactured parts. This innovation alone eliminates around 300 robots and reduces body space by 30%.

This production efficiency can be seen in the company’s operating margins, which significantly beat the competition.

TSLA operating margin (TTM). YCharts data. TTM = last 12 months.

Tesla is a data company

The biggest oversight many investors make when analyzing Tesla is to simply think of it as an automobile manufacturer. You’ve probably seen the various articles pointing out that Tesla’s market capitalization roughly equals all of the other major carmakers combined.

While Tesla’s leadership in the electric vehicle industry certainly contributes to its high rating, I believe the main justification has more to do with its data-centric business model.

Tesla vehicles are essentially computers on wheels, and just like all top companies today, the company is leveraging the data captured by its computers to maximize its value proposition.

This is clearly visible in its push towards autonomous driving. While Musk has been infamously overly optimistic about the release of the company’s Full Self Drive (FSD) feature, Tesla has been beta testing it for nearly two years and recently passed over 100,000 vehicles on the road actively testing the software.

For reference, Alphabet‘S (NASDAQ: GOOG)Waymo, a major competitor in the autonomous driving space, has around 600 autonomous vehicles being tested on the road today.

FSD is built on a machine learning foundation, so every mile that owners walk in theory improves its capabilities. Tesla’s advantage in autonomous vehicle testing is just one example of how it is using its proprietary data as an advantage over its competitors.

Other examples of the company’s use of data acquisition can be seen in its metrics-based insurance product and over-the-air software updates.

While the valuation is high, the profits are flowing

Tesla’s valuation is undoubtedly the biggest concern for the stock purchase. With a price-to-earnings (P / E) ratio of over 100, stocks can’t be said to be cheap.

But while that rating is high, consider how drastically the P / E has been reduced in recent years:

TSLA PE report. YCharts data.

This is partly due to the market retreat in general, but it is also the result of Tesla’s soaring profitability.

Tesla Consolidated Net Profit (Loss)

2017

2018

2019

2020

2021

Current year

($ 2.2 billion)

($ 1.1 billion)

($ 775 million)

862 million dollars

5.6 billion dollars

5.4 billion dollars

Data source: Tesla. Table by author.

Tesla is not a game of value, but a bet on optionality. Even at today’s high prices, I believe there is a huge benefit if the company provides its wide range of disruptive products (autonomous driving, robot taxi, robotics, solar power and more).

Very few of the most valuable companies today ever traded at traditionally low valuations. There is certainly a risk inherent in this investment, but the range of potential outcomes for Tesla is astronomical and reminds me a lot of another top-tier tech company that has been criticized for years as hugely overrated.

IS Amazonwhose founder, like Elon Musk, also sends rockets into space.

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John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Suzanne Frey, executive of Alphabet, is a member of the board of directors of The Motley Fool. Mark Blank has positions in Tesla. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Tesla. The Motley Fool has a disclosure policy.

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