Tesla Stock Undervalued as Outlook Improves

Key Morningstar Metrics for Tesla

• Fair Value Estimate: $200.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Tesla’s Earnings

We’ve raised our fair value estimate for Tesla TSLA to $200 per share from $195 following first-quarter earnings due to the firm’s improved near-term outlook. Shares were up over 10% in after-hours trading as the market reacted positively to management’s outlook. We view Tesla as undervalued, with the stock trading in 4-star territory. We had four key takeaways.

First, the company’s affordable vehicle is still on track for first deliveries by the end of 2025. This is a catalyst for shares. Affordable vehicles should eventually generate a majority of the firm’s total deliveries. We continue to forecast that Tesla will deliver around 5 million vehicles by 2030.

Second, the full self-driving subscription software, or FSD, is seeing stronger adoption. We estimate over 10% of the eligible fleet has adopted subscription software, which is above our prior forecast. As such, we’ve updated our assumptions for a higher adoption rate. We think FSD will drive consumers to choose Tesla over other brands, supporting our outlook for deliveries growth over the rest of the decade.

Third, we raised our forecast for energy storage volume growth. Energy storage volumes increased 4% year over year in the quarter. However, as much of the business is of large-scale batteries built on longer-term projects, volumes can be volatile from quarter to quarter, as they are recognized upon the completion of project milestones. Management guided to at least 75% year-over-year volume growth, which we think is achievable, given that most of these volumes are likely already contracted.

Finally, we slightly raised our 2024 deliveries forecast over our prior prediction of no growth. This is because of Tesla’s recent price cuts, so we also slightly reduced our near-term automotive gross margin forecast. We think Tesla could cut prices further, as management aims to pass most of its cost savings to customers to drive demand.