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The Real Driver of Tesla's Valuation

The firm's delivery guidance may continue to move the stock, but it is somewhat distracting from the real story.

If management had cut its expectations we would have likely reduced our fair value estimate, but our fair value estimate and moat rating remain unchanged. For the fourth quarter, the company expects to deliver 17,000 to 19,000 vehicles, which would mean full-year deliveries of 50,000 to 52,000. We model 52,000. Although Tesla's quarterly delivery record stands at 11,603 achieved in third-quarter 2015, the company shut down its plant for one week in the third quarter to increase throughput 35%; which makes management and us confident that the fourth-quarter delivery guidance is not a stretch.

Ultimately, the intrinsic value in Tesla, to us, is what the company is capable of during the next decade; so delivery guidance may continue to move the stock but it is somewhat distracting from the real story.

Key things to watch in 2016 will be the ramp-up of the Model X crossover, which the company expects will reach full production capability in the first quarter as the supply chain is still being fine-tuned, as well as the unveiling of the Model 3 sedan in late March. The Model 3 will not go on sale until at least late 2017, but its $35,000 price point is a critical step in Tesla moving forward to become a mass-market automaker. We expect the Model 3 will not really be a mass-market EV, as it is called in the media, because with options we expect the car will sell for far more than $35,000. Current tax law means Model 3 customers will not receive the $7,500 federal tax credit as it is limited to the first 200,000 vehicles Tesla produces. EV competition will also increase in the next few years from GM, Audi, and others, but we think Tesla will remain a leading EV firm.

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About the Author

David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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