Tesla‘s (NASDAQ: TSLA) performance on the stock market over the past two years is a bit of an enigma. Even as its Model Y remains the single best-selling car in the world, total deliveries have declined for two years straight. Meanwhile, competition is heating up in the electric vehicle market. Tesla lost its spot as the world’s top-selling EV company last year, and recent industry launches could further erode its market share.
Given all that, why exactly has the stock outperformed broader equities over the past 24 months?Part of the answer is that many investors are excited about the company’s future, which goes well beyond its core EV business. Tesla is looking to usher in a robotics revolution. The company is working hard on its humanoid robot, Optimus. Here’s why the stock could soar as Tesla makes progress in that department.
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Tesla announced it would discontinue its Models X and S this year, partly to make space in its Fremont factory to build its Optimus robots. According to the company’s CEO, Elon Musk, they plan to start initial production of Optimus 3 in the summer and ramp things up by 2027. Musk also claims that Optimus 3 will be the most advanced humanoid robot out there. Provided Optimus 3 is nearly as good as advertised — and perhaps can get close to matching human-level proficiency — it could be a big deal. Here’s why. There is a labor shortage in the U.S., with sectors such as healthcare among the most affected.
Even beyond the shortages, introducing robots into the workforce to replace human workers whenever possible could be a major shift. After all, robots don’t need a 401K and many other costs that people require and are often entitled to by law. Provided the initial cost and maintenance expenses of these robots are low enough, some corporations might choose to go that route and replace many human workers. According to some estimates, Optimus 3’s starting price will be in the $20,000 to $30,000 range — far below the average American’s median annual income.
Assuming these can last five years and even putting annual expenses at $15,000 per year for each, many companies would still be saving money. That could lead to lower overall costs, which might be passed on to customers through cheaper products and services. Further, there is a real possibility that, if demand for Optimus 3 (and future versions of Tesla’s robot) is high enough, the company will expand its manufacturing capacity and eventually lower unit production costs. If everything goes well for Tesla, Optimus will be popular in the office, in warehouses, and in the home.
Musk thinks this could reshape the economy. As he said during the company’s fourth quarter earnings conference call:
I think long-term Optimus will have a very significant impact on the US GDP. It will actually move the needle on US GDP significantly.
If Tesla can make meaningful progress this year as planned — and Optimus 3’s full reveal is well-received — the stock could soar by the end of the year and deliver outstanding returns in the next decade as Musk’s robotics vision becomes reality.
Should investors rush to buy shares of Tesla? Not so fast. It’s important to consider the potential risks involved with the company’s robotics strategy. First, Musk might claim that Optimus 3 is by far the most advanced humanoid robot, but until we see it in action, it wouldn’t be wise to take his word for it. Investors should be cautious even with the company’s planned production schedules. Tesla has sometimes failed to meet its own timeline. Second, there could be significant regulatory risks.
Some lawmakers are worried about the impact of artificial intelligence (AI) on the job market and are introducing bills to track that. By the looks of it, the impact Optimus 3 and other humanoid robots could have on human labor could be far greater than that of current AI iterations. So, we can expect some pushback, and not just from lawmakers. Even if Optimus 3 is as good as Musk claims (and again, we don’t know that yet), regulatory roadblocks might slow its adoption. Lastly, Tesla is trading at levels that imply its robotics work will be successful. The company’s forward price-to-earnings of 185 leaves no room for error.
The stock could have ample upside potential if it executes flawlessly, but there is also significant risk. Tesla might be a buy for long-term, risk-tolerant investors, but risk-averse people will want to stay away.
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Prosper Junior Bakiny 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.
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