2 Things the Smartest Investors Know About Tesla Stock

After Tesla (NASDAQ: TSLA) reported its first-quarter results on April 19, the market seemed dissatisfied with the electric automaker's falling margins and net profit.

Still, there are other important takeaways from the electric vehicle (EV) leader's report that savvy investors pay close attention to.

Electric car is charging.

Image source: Getty Images.

Tesla aims to be the lowest-cost EV producer

After seeing what Tesla did last year (revenue rose by 51% and net income more than doubled), investors hoped for similar results in 2023. Unfortunately, as Tesla repeatedly cut the prices of its EVs, they were disappointed by the consequences -- a slower revenue growth rate of 24% and a 24% decline in net income in Q1.

While nobody likes to see the net income of a company in their portfolio fall, investors should look beyond the headline numbers to understand the company's recent strategic shift. Its aim is to become the EV cost leader.

The idea here is simple. Tesla is reducing its EV prices to improve affordability. An increase in affordability will help Tesla grow sales volume and expand its economies of scale and operating leverage. Those economies of scale, in turn, should help reduce its unit cost of production further, allowing it to cut its EV selling prices further. This virtuous cycle of falling costs of production and rising sales volumes will likely help grow Tesla into one of the world's largest car producers.

Being the lowest-cost producer provides ample benefits. It would allow Tesla to charge roughly the same prices as competitors and have higher profits. Besides, it can make more money on every EV sold via other services such as supercharging, connectivity, and autonomy. Moreover, the price reductions should most likely accelerate the number of its vehicles on the road over time, and that helps the company collect more data to feed into its AI system to further advance its autonomous car projects.

While this strategy makes a lot of sense as a method for improving Tesla's competitive advantages over the long term, it does hurt in the near term. For example, Tesla's revenue fell for the first quarter of 2023 compared to the fourth quarter of 2022, even though sales volume improved in the wake of the recent price cuts.

It will take a few years for the benefits of this strategy to fully accrue to the company. Fortunately, there are early signs of success: The Model Y was the best-selling car in Europe and the U.S. (excluding pickups) in the quarter.

Tesla has a rock-solid balance sheet

Another essential thing that investors at times pay little attention to is Tesla's impressive balance sheet -- with a whopping $22.4 billion in cash, cash equivalents, and investments. That's a remarkable turnaround from when the company was on the brink of bankruptcy a few years ago.

A strong balance sheet will help the company to survive downturns in global economies. During those challenging periods, consumers are less able and willing to buy big-ticket items like cars. Not only does its strong balance sheet give Tesla the cushion to weather financial storms, it also provides it with the flexibility to concentrate on its long-term objectives and keep investing in expanding its market position, even during downturns.

Besides, as Tesla continues its initiatives in areas such as autonomous driving, robotics, and renewable energy, it will need substantial financial resources for investments. A solid balance sheet is even more critical for the company if it is to successfully implement its ambitious plans.

As the saying goes, an empty sack doesn't stand upright. While Tesla has benefited from the vision of CEO Elon Musk, it cannot execute its plans without the necessary financial means. With the support of its robust balance sheet, it can remain at the forefront of the electric vehicle industry and create other innovative offerings.

What does it mean for investors?

Tesla's falling net profits may have disappointed some investors, but the most intelligent investors already see the big picture here.

Tesla's strategic move to become the lowest-cost producer in the electric vehicle industry is a long-term play that may hurt its results in the short term, but should produce tremendous benefits for the future.

Short-term pain in exchange for long-term gains is clearly Tesla's game plan. Investors should probably think along those lines as well.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.