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Shareholders Back Musk's Pay: Hold Tesla (TSLA) for Long-Term

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In a show of enduring faith for Tesla’s (TSLA - Free Report) visionary CEO, shareholders voted in favor of Elon Musk’s hefty pay package of roughly $48 billion (composed of stock options) during the company’s annual general meeting yesterday. This decision underscores the confidence investors have in Musk’s leadership and vision despite recent challenges and legal hurdles.


Musk’s Pay Package Controversy

The saga of Musk’s pay package began in 2018 when it was first approved at a staggering $56 billion. However, earlier this year, a Delaware court invalidated it, citing that Tesla's board did not act in the best interest of shareholders when approving such an extravagant package. This led to a fresh shareholder vote, which ultimately reaffirmed support for Musk, albeit at a reduced value due to the decline in Tesla’s stock price.

Having said that, Musk needs court approval to receive the compensation, and the legal dispute over the compensation plan is far from over. Legal experts predict that the resolution of the lawsuit could take months. But the vote has boosted Tesla's position in ongoing litigation. If approved by the court, this pay package would become the largest executive pay package in U.S. history.


TSLA’s Current Challenges & Prospects

Of late, shrinking automotive margins and a slowdown in deliveries amid a cooling electric vehicle (EV) market have been plaguing Tesla. The company expects its vehicle volume growth rate for 2024 to be noticeably lower than 2023. These headwinds have contributed to the downward pressure on TSLA stock of late. Shares of the company have declined 27% year to date.

Nevertheless, Tesla remains a technological pioneer and a dominant player in the EV market. The long-term investment thesis hinges on its ability to navigate the current downturn and capitalize on new technological frontiers.


5 Reasons to Believe in TSLA’s Long-Term Prospects

1. Electrifying “Non-Automotive” Growth: Tesla’s Energy Generation and Storage business is on a robust growth trajectory on the back of the strong reception of its Megapack and Powerwall products. This segment stands out as Tesla's most lucrative, with the highest margins. Over the past three years, energy storage deployments have witnessed a compound annual growth rate (CAGR) of 120.7%. In 2023 alone, deployments increased 125% year over year, primarily due to the expansion efforts at the Mega factory in Lathrop, California.

Tesla anticipates that energy storage deployments will increase at least 75% in 2024 amid ongoing efforts to ramp up production at the Megapack factory to meet escalating demand. This growth underscores the potential of TSLA’s non-automotive ventures to become significant revenue streams, complementing its core automotive business.

2. NACS to Bolster Charging Business: Tesla's charging division is poised to substantially enhance its overall profitability. Currently, the company's expansive global supercharging network boasts more than 50,000 connectors. Noteworthy automotive giants like Ford, General Motors, Mercedes and others have already enlisted to utilize Tesla's North American Charging Standard (NACS).

This growing adoption of NACS by other automakers positions Tesla’s charging business as a substantial revenue stream. As the EV market expands, the demand for reliable and accessible charging infrastructure will likely increase, further boosting the company’s profitability.

3. Strong Balance Sheet: Tesla’s strong balance sheet provides it with the financial flexibility to pursue growth opportunities. The company’s long-term debt-to-capitalization ratio of approximately 4.4% compares favorably with the industry average of 40%. Additionally, Tesla’s times interest earned ratio of 44 significantly surpasses the industry average of 8.

High liquidity and low leverage allow Tesla to invest in innovation and expansion without compromising financial stability. This financial strength is a critical factor in supporting its ambitious growth plans.

4. Affordable EV Models on the Horizon: The company’s plans to produce new affordable EV models sooner than expected bodes well. Tesla is speeding up its schedule to launch new models, targeting production to start late this year or early 2025 instead of the second half of 2025. The new vehicles, including more affordable options, will combine elements from both next-generation and current platforms, enabling streamlined production on existing manufacturing lines.

The introduction of more affordable EV options is expected to drive sales growth and expand Tesla’s market share. As EV adoption increases globally, Tesla’s ability to offer cost-effective solutions will be a key competitive advantage.

5. Promise of AI Breakthrough: Tesla’s advancements in artificial intelligence (AI) and autonomous driving technology represent significant growth opportunities. The introduction of TSLA’s humanoid robot project (Optimus), the release of its Full Self-Driving (FSD) Beta software (V12) and plans to showcase its robotaxi or Cybercab in August signify promising developments.

Tesla’s approval to roll out FSD technology in China, coupled with a partnership with a Chinese tech giant for mapping and navigation functions, positions the company as a formidable competitor in the autonomous vehicle segment. Musk’s focus on AI and autonomous driving is expected to be a game changer, potentially redefining the transportation landscape.


Bargain Valuation for TSLA

Tesla’s dominance in the EV market, coupled with its innovative capabilities and high growth potential, justifies a premium valuation compared to traditional automakers. That being said, Tesla’s stock is currently trading well below its historical high valuations. From a price-to-sales perspective, TSLA is at an attractive level, offering investors a compelling entry point.

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While its near-term outlook is clouded by market headwinds and legal battles, the long-term prospects remain promising. Tesla’s focus on autonomous driving, AI and non-automotive growth areas positions it well for future success. For investors who believe in Musk’s vision and Tesla’s potential to drive innovation, it presents a compelling long-term investment opportunity. Despite the current downturn, Tesla’s strategic initiatives and technological advancements make it a stock worth holding for the future. The long-term expected EPS growth rate for the stock is 21.6%, higher than the industry’s 15.1%.

Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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