This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The coming year is shaping up to be a pivotal one for Tesla (NASDAQ: TSLA), and it will be a year in which the underlying debate about the future of the electric vehicle (EV) industry will come into intense focus. There are two polemic positions that automakers and investors can take on the debate, but as ever, the reality probably lies somewhere in between.

The good news for Tesla investors is that the company has the opportunity to emerge victorious, regardless of the outcome. 

The great debate over electric vehicles

The crux of the matter was outlined during Tesla's third earnings call in 2024 when management fielded a question on the timing of a $25,000 "non-robotaxi regular car model." Musk's response was to reiterate that "the future is autonomous electric vehicles," which he then claimed most automakers hadn't "internalized" yet. He went on to argue that "I think having a regular $25,000 model is pointless" and "It's fully considered cost per mile is what matters."

Musk is arguing that the lower cost per mile advantage of EVs becomes apparent when the car is driven. Moreover, if the car driven is an autonomous EV in the form of a robotaxi, then that advantage is even higher. Consequently, the most efficient use of an EV is as a robotaxi.

In terms of cost per mile, you could think of matters as follows: Tesla Cybercab robotaxi > Tesla transformed into robotaxi using autonomous full self driving (FSD) > EVs (including Teslas) > regular internal combustion engine (ICE) car > ICE taxi.

Estimates for the cost per mile fluctuate due to external factors (such as fuel costs), but for a rough idea, Musk has mentioned as low as $0.30 per mile for a Cybercab, compared to an average of over $2 for an ICE taxi.

There are a couple of points to consider in addition to this argument. First, a Tesla with autonomous FSD has the potential to have a lower cost per mile than other EVs because the software can drive it in a more efficient manner.

Second, and this is a crucial point in the ICE world, the ICE taxi is the more expensive option on a cost-per-mile basis, which is a major reason why consumers buy cars. However, in the EV world, a consumer will see a robotaxi as a cheaper option on a cost-per-mile basis.

As such, the advent of robotaxis will usher in a fundamentally different way of thinking about mobility than applied in the ICE era.

Tesla's robotaxi plan is to build that future, and investors are buying the stock in anticipation of a massive stream of recurring revenue from its robotaxis in the future. That's why Tesla is aggressively pursuing its robotaxi rollout.

The market needs cheaper electric vehicles

The alternative view has it that the immediate future of the EV industry (the growth area of the auto market) is through the development of low-cost models to reduce the overall cost of ownership. That's why Ford (whose management, in 2016, promised commercial robotaxis by 2021) is investing $5 billion in a universal EV platform, with the aim of offering a $30,000 electric pickup truck in 2027.

Moreover, Ford and General Motors (an automaker that only ended robotaxi development in 2024) are among many automakers that have scaled back their pre-existing EV plans in response to weaker-than-expected sales in 2025 and significant losses on their EV investments.

They believe they are responding to consumer preferences, and the near future will feature the kind of affordable EVs that Musk thought were "pointless," as discussed above.

Which side is right?

They are probably both right, at least in the near term.

The costly Cybertruck and Ford's F-150 Lightning pickup truck have underperformed in sales, while Tesla's most affordable car, the Model 3, has seen sales growth of nearly 18% through 2025, and GM's affordable Chevy Equinox has also experienced strong sales growth. At the same time, the pace of robotaxi rollouts, adoption, and regulatory approval is uncertain and slower than most hoped it would be.

However, Tesla and others are making progress on robotaxis, and the long-term case remains intact. It appears to be an issue of timing. 

Why Tesla could win either way

But here's the thing. Tesla is well-positioned to strategically win in the long term with its robotaxi development, and it's arguably best positioned to win in the near term if the transition takes longer than expected. Unlike peers like Ford and GM, Tesla's EV business is profitable, and in fact, it's already producing lower-cost versions of the Model Y and Model 3 in reaction to market conditions.

It also has the market position and scale to develop lower-cost models. While that's no guarantee that Tesla will produce one if the robotaxi transition is slow, the company is in a much better position to do so than its peers, and that counts for a lot in the investing world.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended General Motors. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla's (NASDAQ: TSLA) latest move -- releasing lower-priced versions of its Model Y and Model 3 -- looks more like a reactionary action than a game-changing effort to make electric vehicles (EVs) more accessible to the mass market. It makes perfect sense in the context of where the business is right now, but it won't appease investors who are looking at Tesla purely as an EV company. Here's the lowdown.

Tesla's electric vehicle sales growth

One thing is clear: Tesla's 2025 hasn't panned out quite the way management expected it would. Back in October of last year, CEO Elon Musk made a rough estimate that the company would achieve 20% to 30% EV sales growth in 2025, backed by lower-cost vehicles "starting in the first half of 2025," and "the advent of autonomy."

New, lower-cost vehicles

That said, the lower-cost trims (a Model Y standard selling for just under $40,000 and a Model 3 standard selling for just under $37,000) will likely help its sales efforts. Moreover, they align with management's statements to investors this year, not least when Musk "let the cat out of the bag" on the earnings call in July, saying the affordable model would be "just a Model Y." In other words, he did not promise to release the company's long-awaited, brand-new, lower-cost model in 2025.

The strategy makes sense, particularly in light of Washington's removal of the EV tax credit. The Model Y and Model 3 have been selling well in the U.S. in 2025, and the arrival of versions with meaningfully lower base prices will inevitably help sales. Moreover, the new trims are unlikely to cannibalize sales of the higher-end Model Y and Model 3 trims, as the price differentials between the new models and the next-cheapest models are $5,000 and $5,500, respectively.

Instead of the much-anticipated launch of a low-cost model, this move appears to be a response to the removal of the tax credit in the U.S. and the persistence of relatively high interest rates worldwide.

What the new models mean to investors

While these cheaper EVs aren't game-changers in themselves, they do build on some improving sales trends for the company. Indeed, there's evidence to suggest that Tesla's sales are already building momentum after a disappointing first half.

For example, interpolating from Tesla's third-quarter delivery data and industry analysis of Tesla's sales in the U.S., it's possible to argue that its strength in the third quarter was broad-based and possibly related to the Model Y refresh gaining traction. Remember that the looming removal of the federal EV tax credit only impacted U.S. sales, so Tesla's strength in international sales was particularly welcome.

Data source: Tesla presentations, *Kelley Blue Book EV sales report, **author's analysis

Moreover, the fact that the new models are unlikely to cannibalize sales of existing Model Y and Model 3 vehicles means the road is still clear for Tesla to launch its much-talked-about $25,000 car, which some refer to as the "Model 2." If that vehicle comes to market, it's highly likely to be a wholly new and differentiated product that won't impact sales of other Tesla models.

What it means for investors

These models should build on the momentum the company gained in the third quarter and help it navigate a challenging period in the U.S., particularly due to the loss of the EV tax credit. They will also add to the fleet of vehicles on the road whose values could be significantly raised by the "advent of autonomy." 

While uncertainty remains when it comes to the timeline of these events -- specifically, the company's deployment of fully autonomous robotaxis and the later public availability of fully autonomous FSD (which would be a game-changer) -- the stock will remain an option for speculative investors, albeit an excellent one. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Tesla's sales and margins are falling, but that doesn't mean its robotaxi business is a tactical move to start growing again.
• The optimal use of an electric vehicle is as a vehicle that's frequently run to take advantage of low running costs.
• The robotaxi rollout is risky, but comes with high potential reward.

Tesla (NASDAQ: TSLA) stock is down so far in 2025, but it generated phenomenal returns over the last decade. Such stock performance creates the impression that the party might be over for Tesla's stock, and it's too late to buy in. It doesn't help matters that Tesla's electric vehicle (EV) sales growth has declined so far in 2025 while its margins and market share fall. Much of the hope for the stock seems to rest on the risky rollout of its robotaxi business.

Why Tesla stock is still attractive on a risk/reward basis

Let's not sugarcoat matters; declining sales and margins aren't good news. However, instead of viewing the robotaxi business as the savior of a challenged business, investors should consider it the natural and inevitable evolution of the EV industry.

That's a viewpoint backed up by the fact that other automakers and technology companies have pumped billions into EVs, and notably, developing autonomous vehicles and the software that runs them.

Why Tesla's robotaxi strategy makes sense

The simple reason why is that the high upfront costs and much lower running costs (servicing, maintenance, fuel, etc.) of an EV compared to an internal combustion engine (ICE) mean that the best economic case for an EV should be as a vehicle that is constantly driven, not staying in a garage. In other words, a commercial fleet vehicle, a delivery vehicle, or a robotaxi.

As such, Tesla's robotaxis and full self-driving (FSD) software aren't moonshots to "save" a company in competitive decline; they are an inevitable evolution of the auto industry. Whether they will be successful or not is another matter, but no company stands in a better position to commercialize the opportunity than Tesla.

If you believe this is the case, then there is still time to get in on Tesla's future performance as an investor. 

 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Tesla's full self-driving (FSD) solutions and robotaxis have always been an integral part of the company's investment case.

• Successful deployment of unsupervised FSD is critical to the company's future.

• Tesla is a risky investment, but it also holds significant potential reward.

If there's one thing that's clear from Tesla's (NASDAQ: TSLA) second-quarter earnings report, it's that everything is riding on its full self-driving (FSD) system. As such, investors should view Tesla as a risky growth stock, albeit one that's favorably positioned in an end market that the rest of the automakers continue to chase and have invested billions in. Here's why FSD and Tesla's robotaxis are the key to understanding the investment proposition and why I predict their successful development could lead to huge returns for investors.

Tesla is more than a car company

There's no point tiptoeing around the elephant in the room. Tesla's sales this year have not been what management would have hoped for. Moreover, CEO Elon Musk is clear that Tesla could face "a few rough quarters" as relatively high interest rates make car-buying less affordable, and the removal after Sept. 30 of a federal tax credit of up to $7,500 for eligible electric vehicles (EVs) will negatively impact sales.

As such, Tesla's sky-high valuation (it trades at 191 times Wall Street earnings estimates for 2025) is often used as a stick to beat the stock with. That's fair enough, and valuations always matter. Still, the key to the investment case has long been Tesla's potential to develop a highly lucrative stream of revenue from selling FSD and its robotaxi business.

FSD and robotaxis are integral to the EV business and should not be viewed as optional add-on "moonshot" businesses. I have four reasons why.

A successful robotaxi rollout will improve FSD adoption

Musk plans to aggressively, but safely, roll out Tesla's nascent robotaxi service (which uses an updated version of FSD not available to the public yet). While Musk's plan to have autonomous ride hailing available to "half of the population of the U.S. by the end of the year" -- if regulators approve -- is questionable, there's little doubt Tesla will expand the service when possible.

The interest created by Teslas robotaxis is likely to increase awareness of the value and optionality of Tesla's publicly available FSD. Indeed, CFO Vaibhav Taneja noted that "we've started seeing an uptick in FSD adoption in North America in recent months." That's something that could increase as public awareness of FSD increases due to robotaxi rollouts.

Tesla's Cybercab plans depend on a successful robotaxi roll out

The dedicated robotaxi vehicle called Cybercab is central to Tesla's plans, and management continues to expect "volume production starting in 2026." Here again, the successful development of Tesla's robotaxi service (which currently runs with Model Ys) is an integral part of the plan. There's no point scaling up Cybercab production if the robotaxi rollout isn't working.

Musk believes the Cybercab could get the cost of a taxi under $0.30 per mile over time -- something that would revolutionize the taxi industry.

Tesla's EVs become more attractive with unsupervised FSD

Tesla's EVs will become more attractive, more affordable, with unsupervised FSD. And with robotaxis driving increasing awareness of FSD and the possibility of unsupervised FSD in the future, allowing Tesla owners to convert their vehicles into robotaxis, the value of a Tesla EV should increase in the eyes of customers. As such, FSD is also something that can improve Tesla's sales in the future.

FSD may be needed to secure financing

The earnings call contained an interesting question on how Tesla would finance scaling the robotaxi business, a particularly relevant question given that declining sales led to Tesla's free cash flow coming in at just $146 million in Q2. To be fair, Tesla has $29.6 billion in net cash (roughly equivalent to three years' capital spending) and is still generating cash.

Still, if Tesla needs to seek financing, it would need to demonstrate a stream of cash flow from FSD and robotaxis to facilitate that.

Can buying Tesla stock set you up for life?

There's no guarantee Tesla will develop publicly available unsupervised FSD nor that the robotaxi concept and scaling will work, nor that Cybercab will be successful. In addition, Tesla could face additional costs from possibly needing to upgrade older hardware models (Hardware 3) to be able to use unsupervised FSD in the future.

There are hurdles to overcome, and everything rides on unsupervised FSD, so Tesla is a risky stock.

But here's the thing. The robotaxi market is being chased by Alphabet, Amazon, General Motors, Volkswagen, Baidu, and others, and Tesla remains the company that looks best placed to succeed in the market commercially. It has the financing, the EV market leadership, and potentially, the technology to do so. It's a risky investment, as everything rides on unsupervised FSD, but it's also one with potential reward, and such investments have a place in an aggressive investor's portfolio. Just be prepared for volatility if you buy in.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Baidu, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended General Motors and Volkswagen Ag. The Motley Fool Australia has recommended Alphabet and Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) isn't, strictly speaking, an electric vehicle (EV) company. However, its autonomous driving technology company, Waymo, is committed to only using EVs in its fleet. Funnily enough, it could be argued that Tesla (NASDAQ: TSLA) isn't really a pure EV company either. After all, most of its sky–high valuation is attributable to the potential of its robotaxis.

However, the comparison of these two as EV companies is valid because the future of the auto industry is EVs, and ridesharing in autonomous vehicles will be a larger part of the industry in the future. But which company is better placed, and which is the better stock?

Alphabet vs. Tesla

It's entirely possible that Alphabet could decide to spin off Waymo, not least because it reportedly could be valued at more than $45 billion. Meanwhile, one of Tesla's biggest supporters, Cathie Wood's Ark Invest, ascribes 88% of Tesla's enterprise value (market cap plus net debt) to robotaxis in its investment case for the stock, producing an expected value of $2,600 for the stock in 2029.

As I have previously discussed, the Ark targets should be taken with a pinch of salt, as its track record on Tesla hasn't been good. However, Ark's core argument is sound and points to Tesla being potentially a far more valuable stock than Waymo ever will be.

Pathways to profitability

The core argument is that Tesla's business model is scalable to profitability while Waymo's is far less so. The issue of Waymo's profitability arose in a recent CNBC interview with Waymo co-CEO Tekedra Mawakana, where she was asked whether Waymo is profitable. She replied, "We're proving out that it can be a profitable business." When asked when Waymo would be profitable, she replied, "not clear."

It's also not clear if Alphabet/Waymo doesn't have an internal forecast for when it will hit profitability, or if Mawakana preferred not to divulge what the company considers an uncertain forecast. However, it's inconceivable that Alphabet is not internally crunching the numbers on this, and if it does decide to spin off Waymo, it's a question that needs to be answered.

The point here is that a business that can't be profitable isn't worth anything, let alone $45 billion, so at some point, its management is going to have to set some timelines.

Tesla and timelines

Whereas investors need to hear more about timelines from Waymo, whose public self-driving ride-hailing service was launched in 2018, there's probably a need for fewer declared timelines from Tesla, or, rather, a need for more accurate ones. For example, in 2019, CEO Elon Musk famously told investors to expect a million self-driving vehicles on the road by mid-2020. In April 2022, he also stated that Tesla aspired to reach volume production of a dedicated robotaxi (Cybercab) in 2024 -- a timeline that has now been pushed back to 2026.

These timeline estimates matter because plugging overly optimistic assumptions from them into valuation models can produce dramatically erroneous conclusions.

Why Tesla is better positioned

With all that said, Tesla has clear advantages over Waymo, provided it can demonstrate safety and reliability and achieve regulatory approvals. Its advantages include:

• Lower vehicle costs, with Musk aiming for a $30,000 price tag for a dedicated robotaxi, the Cybercab. Meanwhile, Wall Street analysts estimate Waymo's current vehicles cost more than $120,000.
• In addition, Tesla manufactures its own cars (Waymo does not), and existing Teslas can be converted into robotaxis using Tesla's as-yet-unreleased-to-the-public unsupervised full self-driving (FSD) software, giving Tesla a significant advantage in scaling the robotaxi business.
• Tesla's use of camera-centric technology is inherently less expensive than Waymo's combination of cameras, light detection and ranging (Lidar) lasers, and high-definition maps.
• Every Tesla car (robotaxi or not) on the road is effectively a data gatherer, with the data used to improve the AI that powers its AI models. As such, even though Waymo was first, Tesla has significantly more data than Waymo.

Which is the better EV stock?

Waymo may become profitable in the future, particularly if Lidar costs continue to drop. However, it's challenging to think that it will be a strong competitor to Tesla, provided Musk's company can master safe, unsupervised FSD using a camera-centric approach. That's a big "if" at this stage, but it becomes a smaller "if" as time goes by and Tesla expands its nascent robotaxi offering across new geographies. Tesla's next robotaxi launch is expected to be in Phoenix, as it plans to continue slowly building its robotaxi business. I think Tesla is the better EV stock when comparing Tesla and Alphabet.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet and Tesla. The Motley Fool Australia has recommended Alphabet. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Cathie Wood's Ark Invest has been one of the most vocal supporters of and investors in Tesla (NASDAQ: TSLA), and it's no secret in the investing world that Ark has a $2,600 price target on the stock for 2029. Still, what does that target mean, and does Ark's reasoning make sense? Here's the lowdown.

Ark Invest's $2,600 price target

The investment company's price target won't be "right," but then again, it's not supposed to be. It's an expected case scenario produced by a Monte Carlo simulation. In other words, Ark plugged numerous variables into an algorithm and ran a vast number of computer simulations to model a range of randomized outcomes. It's not necessary to get into the weeds about how these simulations are done; suffice it to say that on the bearish side, Ark's model shows a 25% chance that Tesla's stock price will be $2,000 or less in 2029, and on the bullish side, it finds a 25% chance that it will be $3,100 or more. Roughly in the middle lies Ark's expected value of $2,600 for the shares.

The modeling itself is almost certainly wrong, simply because it relies on variables that are incredibly hard to predict.

To illustrate just how challenging it can be to make accurate stock forecasts using this kind of simulation, let's revisit the predictions Ark made in 2021 and 2023 for Tesla's share prices in 2025 and 2026, respectively.

Tesla's current stock price in 2025 is about $320.

Data source: Ark Invest presentations.

Tesla's stock price is currently far below even the bearish scenario Ark simulated in 2021, and it would have to increase by 806% to hit the bear case scenario for 2026 that was projected in 2022.

All of which is not to criticize Ark, because modeling the long-term value of a speculative growth stock like Tesla is incredibly difficult. The point is not to take the targets too literally.

But if investors can't take such price targets as gospel, is there anything to be gleaned from Ark's analysis?

As a matter of fact, there is.

Where Ark's model makes sense

The key points from the model that investors can take away are the following:

• Tesla's share price is highly sensitive to the timing and scaling of its robotaxi and Full Self-Driving (FSD) capabilities.
• The $2,600 price target for 2029 assumes that at that point, 88% of Tesla's enterprise value (market cap plus net debt) will be attributable to its robotaxi business, and just 9% to its electric vehicle (EV) sales.

The message is clear: Don't buy Tesla stock unless you believe there's a good chance its robotaxi service (which may already be operating in its first market by the time you read this) won't be successful. Everything is riding on the company's robotaxi bet.

Tesla's robotaxis

Tesla's unsupervised Full Self-Driving (FSD) system is unproven, as is its robotaxi concept. Notably, it has yet to begin volume production of its dedicated robotaxi, the Cybercab. Moreover, there are myriad regulatory hurdles and safety concerns to overcome. Simply put, Tesla's robotaxi business is risky. And if it fails, it will likely set Tesla back significantly. Buyer beware.

That said, while Tesla is a speculative growth stock -- remember, buyers at this point are investing primarily for its robotaxi business, not its electric vehicle business -- it's a growth stock with a difference. Tesla continues to dominate the EV market, and rivals such as Ford Motor Company and General Motors, have withdrawn from the robotaxi race.

The auto industry as a whole has invested billions into the various efforts to develop a fully autonomous vehicle, and Tesla has not been alone in overpromising and underdelivering on it. Yet Tesla is launching its robotaxi service, and it has the vehicles, the data hoard, and the cash reserves to make it work. It's also ideally placed to start producing lower-cost EVs (which can be used as robotaxis controlled by unsupervised FSD systems), and the company says it's set to begin volume production of the Cybercab in 2026.

Where Wood might be right

Ark Invest is correct that the robotaxi business will be the key to Tesla's longer-term valuation and also the future of the auto industry. If -- and it's a big if -- Tesla can get the technology right, then there's significant upside for the stock, because all the other operational ingredients are in place for the company to make it work. That's where Wood and Ark might be right after all.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended General Motors. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

If you want to know where a company's sales are heading, it's a good idea to follow what its key customers are saying about spending. In the case of Nvidia (NASDAQ: NVDA), that means looking at how hyperscaler cloud service providers like Amazon.com's Amazon Web Services, Alphabet's Google Cloud, and Microsoft's Azure are planning to spend money on AI and data centers and whether their plans are changing.

Spending on data centers remains robust

As data center equipment companies like Vertiv recently outlined, the pipeline of investment in data centers remains strong. The capital spending plans of the cloud service providers discussed above support that view.

The good news is that they are planning significant increases in spending in 2025, and that's great news for Nvidia. For example, Amazon's spending on property and equipment was $83 billion in 2024, but when discussing plans for 2025 on its earnings call in February, CFO Brian Olsavsky said he expected the run rate of $26.3 billion to represent spending in 2025. This equates to $105.2 billion, and he said that "the majority of the spend will be to support the growing need for technology infrastructure. This primarily relates to AWS."

Turning to Alphabet, which made $52.5 billion in capital spending in 2024, its CFO Anat Ashkenazi said it planned to spend $75 billion in 2025 and "increase our investments in capital expenditure for technical infrastructure, primarily for servers followed by data centers and networking."

It's a similar story at Microsoft, where Vice Chair and President Brad Smith told investors that Microsoft plans to spend $80 billion in its fiscal 2025 to build out AI-enabled data centers -- part of a trend in which Microsoft has doubled its data center capacity over the last three years.

No let-up in demand for Nvidia

The trends in AI-related data center spending remain excellent. Unless these companies change their capital spending plans and management outlooks, Nvidia is likely set to have another great year.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Power utilities aren't always seen as the most exciting way to invest, but investors might need to rethink that opinion, because the top-performing S&P 500 index stock of the year is retail electricity and power generation utility Vistra (NYSE: VST), up a whopping 210% this year. That beats Nvidia's (NASDAQ: NVDA) 155% increase. The two events are not unconnected. Here's why and how Vistra stock has performed so well this year.

Data centers, electricity demand, and clean energy

It's no secret that the burgeoning demand for artificial intelligence (AI) applications is the reason for the step change in expectations for data center demand. That's what's fueling increased demand for graphics processing units (GPUs) and high-performance computing chips. That's great news for technology companies like Nvidia and Taiwan Semiconductor Manufacturing.

While the latter are apparent beneficiaries, there are also data center equipment companies like Vertiv Holdings. If you are looking for a value play on the theme, then the heating, ventilation, air conditioning, and refrigeration sector, particularly Johnson Controls, is worth looking at.

However, I digress. This article's focal point is the need to power data centers and increased electricity demand. In particular, it is in an environment where policymakers remain committed to the clean energy transition. That's where companies and utilities like Vistra and Constellation Energy (NASDAQ: CEG) come into play.

Vistra 

Vistra is a retail electricity and power generation company. At the end of 2023, it counted 4 million retail customers, and the acquisition of Energy Harbor in March added another 1 million. The Harbor Energy deal also added 4,000 megawatts (MW) of nuclear generation to go along with the 36,702 MW with which Vistra ended 2023, with 2,400 MW from nuclear.

As such, the deal made Vistra "the largest competitive power generator in the country" and made it the second-largest competitive nuclear generator in the U.S. Investors are falling in love with nuclear energy as a clean, sustainable, and zero-carbon baseload option. That's particularly relevant as coal-powered plants are being closed down in accordance with the clean energy transition.

The clean energy transition

While nobody doubts that the transition will take place, it's also indisputable that sentiment over the pace of the transition has changed, too. The long-term policy outlook remains favorable to renewable energy; natural gas will likely be a significant part of energy generation for decades.

That's also good news for Vistra, because about 24,000 MW of its current 41,000 MW capacity comes from natural gas. As such, the rise in the stock price this year also reflects a more favorable view of natural gas and a vote of confidence in Vistra's 6,400 MW nuclear capability.

Enter Amazon and Microsoft

The three biggest cloud service providers are Amazon Web Services, Microsoft's Azure, and Alphabet's Google Cloud, and they need to ensure long-term power to support their data centers. As such, Microsoft and Amazon completed long-term power purchase agreements (PPA) with Vistra this year.

Still, it's the 20-year PPA that Microsoft recently signed with Constellation Energy that has excited the market. Microsoft is purchasing power for its data centers, and Constellation will restart the Three Mile Island nuclear plant to deliver on the agreement. That's a positive for the market, and so is the price that Microsoft is willing to pay for the power.

According to Reuters, Microsoft is paying up to $115 per megawatt-hour (MWh) in the agreement. That compares favorably with Vistra's total realized price of $51.20 MWh in the second quarter of 2024.

A stock to buy

The bull case for Vistra rests on the idea that there's significant upside potential for future market pricing for nuclear-powered energy, given the Microsoft/Constellation deal and burgeoning demand stimulated by AI. Vistra's acquisition of Energy Harbor strengthened that case. In addition, Vistra recently announced it was buying the remaining 15% of its Vistra Vision subsidiary (which houses its zero-carbon nuclear, energy storage, and solar generation businesses) for $3.085 billion.

Vistra's natural gas, nuclear, and renewable capabilities are positive assets for the clean energy transition. Considering these factors, it's no surprise that the sector is hot. Adding falling interest rates (utilities are often seen as interest rate sensitive due to their debt loads) is a recipe for sharp price appreciation.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Constellation Energy, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Johnson Controls International and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Constellation Energy, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Johnson Controls International. The Motley Fool Australia has recommended Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Some of the most critical questions any investor can ask before buying a stock center on its profit margin. As a rough rule of thumb, it's usually a good idea to look at stocks with rising margins and avoid those with margins in decline.

Let's find out why by looking at two market-beating stocks. Illinois Tool Works (NYSE: ITW) and Honeywell International (NASDAQ: HON) have increased more than 250% over the last decade compared to the S&P 500's increase of 183%.

Two key benefits of rising margins

The first benefit is somewhat obvious, but the second might come as a surprise. They both relate to margins and their impact on valuation. 

• Rising profit margins, provided revenue keeps growing, mean more profit, which usually means a higher valuation.
• Rising profit margins encourage investors to pay a higher multiple for the stock, leading to higher valuations. 

These arguments are demonstrated in the charts below. Here's how the two companies have raised operating profit margins over the last decade. 

Data by YCharts.

Here's a look at how the market has demonstrated a willingness to pay higher multiples for the stocks. The multiple used here is enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA). It's a commonly used valuation method that factors in debt. 

Data by YCharts

However, it's not a hard and fast rule. For example, highly cyclical stocks like Caterpillar (NYSE: CAT) can have wildly fluctuating revenue and margins due to the vagaries of the construction, mining, and energy markets and copper. Still, the case for buying Caterpillar's stock is based on rising profit margins. Caterpillar's margins will hopefully trend upwards over time while fluctuating on the way. In Caterpillar's case, it primarily comes down to management's efforts to expand its higher-margin services revenue. 

Data by YCharts..

Illinois Tool Works and Honeywell

The two companies took different routes to raise their profit margins. Since CEO Scott Santi took over in 2012, Illinois Tool Works has been driven to improve margins through the execution of its enterprise strategy. Its initiatives within the strategy emphasize focusing on markets and product lines where it has an advantage, and practicing its "80/20 front-to-back" practices.

The latter involves a customer-led focus on the 20% of its customers that generates 80% of its revenue and refining its competitive strategy based on feedback from customers. It may sound like simple blocking and tackling, but it's been good enough to help improve the operating profit margin from 15.9% in 2012 to to around 24% in 2022.

For Honeywell, it's more a case of investing in growth businesses and "breakthrough" initiatives that give it differentiated products with real pricing power. Examples include quantum computing, airplane Wi-Fi, warehouse automation, building controls, IoT sensors, systems for air taxis and cargo drones, and a host of sustainable technology solutions. In a year of high inflation, it's imperative to be able to raise prices to offset costs and grow margins. Honeywell is doing just that in 2022, with its prices up 9% year to date , and the company is set to raise its profit margin again this year.

Buy stocks with companies that have rising margins

The examples of Honeywell and Illinois Tool Works highlight the importance of buying stocks with rising margins and a plan or business model to raise margins. 

Similarly, stocks that aren't raising margins (with the notable caveat of cyclical stocks and very early growth stocks) are worth avoiding. It's the key metric to look for when appraising a stock.                    

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The key metric investors should watch for every stock appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has positions in Honeywell International. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares in Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) declined by 13.7% in June, underperforming the benchmark S&P 500 index's decline of 8.4%. The place to start when looking at why is by analyzing what's in the Berkshire Hathaway portfolio. So here's a table of all the holdings above 3% in the portfolio as of March 2022. 

Data source: Berkshire Hathaway SEC filings.

As you can see below, Apple's performance in June was pretty much in line with the market, and the leading consumer staples stocks (Coca-Cola and Kraft Heinz) outperformed the market. However, the finance and energy stocks significantly underperformed. For reference, Berkshire holds a further 7% in banking and finance stocks.

Data by YCharts

The performance in June marks a reversal of fortune because, going into the month, Berkshire Hathaway was up in 2022 with a 5.2% gain compared to a 13.3% decline in the index. In addition, energy and consumer staples led outperformance to the start of June.

So what

The reversal in Berkshire Hathaway's performance reflects the shift in the market's mood more than any fundamental change in the long-term prospects of the companies in the portfolio. Speculators likely bought into the type of stocks seen as benefiting from inflationary trends (energy) and kept buying until the Federal Reserve acted aggressively to combat inflation by hiking rates. 

However, as the market anticipated and then digested the Federal Reserve rate hike in the middle of June, it sold off the "inflation plays" as well as the cyclical, banking, and financial stocks. The idea is that rising rates will make spending and investment more expensive, meaning end-market demand will tail off.

Now what

The market will do one thing, and Buffett will do another. Reacting to near-term market movements and trying to trade sentiment and mood changes among investors is rarely a winning strategy over the long term. Indeed, Buffett's success as an investor lies precisely in avoiding this kind of knee-jerk trading. Instead, Buffett tends to favor buying and holding companies for their long-term fundamental earnings power. And while the market is panicking, it's worth noting that Berkshire Hathaway is only down 1% on a year-over-year basis. Something to consider. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why shares in Berkshire Hathaway fell in June appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's been a challenging year for investors, with the S&P 500 index down more than 22%. In such an environment, growth investors inevitably may ask whether it's time to start loading up on some growth stocks like Tesla (NASDAQ: TSLA). Here are some thoughts on the matter.

What happened in 2022

Going into 2022, the general narrative around the market was as follows:

• Raw-material cost inflation would persist but ease in the second half as supply chain issues ironed out.
• Smoothing supply chain issues would ease cost pressures -- with no more high spot prices for components or transportation.
• In concert with an opening of the economy, labor shortages would ease alongside a gradual easing of COVID-19 restrictions. 
• Strong demand, rising backlogs, and price increases would lead to stronger substantial profit margins in the second half.

That was the game plan. However, as Mike Tyson famously observed, everyone has a plan until they get punched in the mouth. The unfortunate reality is that raw material prices remain elevated, supply chain pressures persist, and companies struggle to secure components. Labor shortages are ongoing (witness the high-profile issues at airports); COVID-19 lockdowns have continued longer than most expected (notably in China), and Russia's invasion of Ukraine (along with the policy response to it) has exacerbated many of these issues.

The year in charts

These adverse developments have caused a slew of full-year guidance earnings downgrades. Given the persistence of these headwinds, it's reasonable to expect more to come in the second-quarter earnings season.

It gets worse. The persistent inflation caused the Federal Reserve to hike interest rates. It was a move widely anticipated by the market, and as you can see below, market rates (the 10-year Treasury) increased, taking mortgage rates higher too. That's bad news for interest rate-sensitive sectors like housing and autos.

Data by YCharts

What does this mean for Tesla?

Industry analysts have rushed to downgrade global industry production forecasts in 2022 due to supply chain pressures. Tesla is not immune to such challenges, and there's an open debate on whether the company will meet its target of 1.5 million units in 2022. And in a leaked email, CEO Elon Musk appeared to call on employees to rally back from a tough second quarter. After only 305,000 units were produced in the first quarter (and possibly fewer in the second quarter), Tesla's target goal is in question.

Also, Tesla is in one of the interest rate-sensitive sectors mentioned above. Rising interest rates will inevitably make it harder for consumers to take on debt to buy electric vehicles.

The case for buying growth stocks like Tesla

That said, there's still a robust case for buying growth stocks, Tesla included. 

First, the Federal Funds rate hike appears to have taken some speculative fervor away from commodities investors. The Thomson Reuters/CoreCommodity Commodity Research Bureau (TR/CC CRB) index follows 19 commodities, including aluminum, copper, and other industrial metals; precious metals; crops; livestock; and energy commodities.

As you can see below, although still at relatively high levels, it's corrected slightly. Moreover, as the economy continues to open up and labor shortages get ironed out, the supply chain issues will likely ease eventually.

Data by YCharts

Second, just as the bond market wasted no time in pricing higher rates, the stock market sell-off means equities look like a much better long-term value than in January. 

Third, growth stocks like Tesla will, by definition, generate the overwhelming bulk of their earnings in the future. Therefore, investors shouldn't overly stress over one year's earnings or failure to meet production targets.

Fourth, Tesla is a growth company with relatively secular growth drivers (not reliant on economic growth). Indeed, many investors favor it precisely because it sells EVs and therefore has an opportunity to outgrow light vehicle sales growth significantly.

Time to buy growth stocks?

Suppose you believe that these trends -- higher inflation, interest rates, mortgage rates, and supply chain issues -- will persist. In that case, you'd want to stay away from growth stocks because their outlooks would be muted. And that would include Tesla.

However, if you believe the economy will muddle through and supply chain issues will eventually ease, then it's an excellent time to get exposure to growth stocks like Tesla.

History suggests that the economy will muddle through, but the upcoming second-quarter earnings season will likely feature a slew of earnings downgrades. As a result, cautious investors might want to wait until it's over before trying to find an entry point. However, if the "muddle through" thesis is correct, the recent dip looks like a good buying opportunity. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is it time to load up on beaten-down growth stocks (like Tesla)? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of China's troubled property company Evergrande Group (OTC: EGRN.F) were suspended from trading on Monday due to the announcement of an order to demolish 39 buildings under construction in China. According to local reports, the building permits were illegally obtained, and authorities had consequently ordered their destruction.

So what

It's the last thing equity investors, bondholders, and Evergrande property investors wanted to hear. The company is engaged in an ongoing struggle for survival that involves selling assets and shares to pay suppliers and meet bond coupon payments. The news that it will have to destroy buildings under construction will not be well received.

Both Evergrande and another large China property group, Kaisa, have missed bond payments, and rating agency Fitch has already cut their debt ratings to restricted default. Moreover, Fitch's analysis assumes both companies will be liquidated in bankruptcy. For a flavor of how bad things are in the sector, consider that Fitch estimates the value of Kaisa's investment properties is just 17% of the book value given by the company at the end of the first half of 2021. 

Now what

It's no secret that Evergrande and Kaisa are in liquidity trouble, but the critical question is whether there will be contagion in China's credit markets. The answer to that probably comes from potential government action to limit the fallout in the sector by helping Evergrande with a restructuring plan. Until that happens, investors have cause to be very cautious about the sector in general. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Evergrande shares were suspended today appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

A collaboration between diversified industrial AbbVie Inc (NYSE: ABBV) and Amazon.com, Inc. (NASDAQ: AMZN) is likely to increase electric vehicle (EV) adoption among transportation companies and fleet operators.

That's the key takeaway from the recently announced collaboration between ABB and Amazon's cloud computing business, Amazon Web Services (AWS). ABB will bring its know-how in energy management and charging technology to AWS' cloud technology, software, and analytics capability to create "a cloud-based digital solution for the real-time fleet management of EVs," according to the press release.

The new solution will roll out in the back half of 2021 and use advanced data analytics and machine learning to optimize EV fleet performance. For example, it will enable fleet operators to manage the charging of their fleet in accord with optimizing routes for EVs.

Given the reality that an all-EV fleet will probably contain a range of vehicles, it's likely that fleet operators will be looking for software to help them centrally manage a diverse set of EVs with different charging characteristics.

The ABB and AWS solution is intended to give fleet owners greater confidence in making the switch. For examples of how transportation companies are warming to EVs, consider that UPS has ordered 10,000 purpose-built EVs. Meanwhile, FedEx is committed to only buying EVs for its FedEx Express parcel pickup and delivery fleet by 2030. Management plans to have its entire parcel pickup and delivery fleet running on zero-emission EVs by 2040.

All told, the transition to EVs is real among fleet operators, and the ABB and AWS solution is likely to help accelerate it.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Amazon and ABB partner to help push EV adoption appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.