After Earnings, Is Tesla Stock a Buy, a Sell, or Fairly Valued?

Tesla TSLA announced its first-quarter earnings on April 23. Here’s Morningstar’s take on Tesla’s earnings and the outlook for its stock.

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 Q1 Earnings

• Affordable vehicles: In our view, Tesla’s most important update was its confirmation that the firm will still produce an affordable vehicle. Heading into earnings, media reports suggested the vehicle may have been canceled. A key driver of our thesis on Tesla is an affordable vehicle driving a second wave of deliveries growth, so clarity on these plans was vital.
• 2024 deliveries: Deliveries declined in the first quarter, but we think recent price cuts, the refreshed Model 3, and improved production at the Austin and Berlin factories should generate better sales through the rest of 2024. We slightly raised our deliveries forecast for small growth in 2024 from our prior assumption that deliveries would be flat versus the 1.81 million vehicles delivered in 2023.
• Autonomous driving software: We view Full Self-Driving as a key differentiator that leads some consumers to choose a Tesla over other comparatively priced vehicles. On the earnings call, management said half of eligible US drivers use the software. Higher FSD adoption will drive increased software revenue and profits for the automotive business, which should help segment margins.
• Energy generation and storage: Management guided to at least 75% volume growth in this business, which is growing faster than automotive. Given that this business primarily sells larger batteries to industrial and utility customers for multi-year projects, we think management likely has good visibility into its near-term growth. Over time, this will become more important to the firm’s profits as it sees higher revenue growth and profit margins than automotive, and we raised our forecast for the segment following earnings.
• Stock valuation: Tesla is a high-growth stock. With uncertainty around the company’s affordable vehicle and declining deliveries, its stock sold off heavily in early April as market sentiment turned against its growth prospects. We believe the earnings report and call went a long way to improve market sentiment. The stock rallied as a result, and we think sentiment could continue to lift as it reflects the company’s improved growth outlook.

Fair Value Estimate for Tesla Stock

With its 4-star rating, we believe Tesla’s stock is undervalued compared with our long-term fair value estimate, which we’ve raised to $200 from $195 after updating our model following the firm’s first-quarter earnings. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse and non-dilutive convertible debt.

We forecast Tesla’s deliveries will be slightly higher in 2024 than the 1.81 million in 2023. We forecast lower average selling prices, as the company will likely have to cut prices in key markets like China, in line with peers. We forecast automotive gross margins will be 19% in 2024, in line with 2023 results.

Additionally, we assume Tesla’s overhead expenses continue to decline as a percentage of sales as the company benefits from operating leverage as deliveries grow. As a result, we forecast companywide operating margins will return to the mid-teens levels by the end of the decade, in line with the 17% achieved in 2022 and well above the 9% margin in 2023.

Read more about Tesla’s fair value estimate.

Economic Moat Rating

We award Tesla a narrow moat based on its intangible assets and cost advantage. The company’s strong brand cachet as a luxury automaker commands premium pricing, while its EV manufacturing expertise lets it make its vehicles more cheaply than competitors.

Tesla will face increasing competition in the coming years. Automakers plan to electrify their fleets by adding EV versions of existing vehicles and creating new platforms. However, we see EVs becoming a greater proportion of auto sales, growing to 30% by 2030, up from 3% in 2020, which will expand the market as they rapidly take share from internal combustion engine vehicles. As new models are introduced, Tesla’s technological advantage and the strength of its brand will remain intact, letting it continue to charge premium prices for its EVs.

Read more about Tesla’s economic moat.

Financial Strength

Tesla is in excellent financial health. Cash, cash equivalents, and investments stood at $26.9 billion and far exceeded total debt as of March 31, 2024. Total debt was around $4.8 billion, while total debt excluding vehicle and energy product financing (nonrecourse debt) was a little more than $50 million.

Management prefers to pay down all debt over time, and it has essentially achieved this goal. Regardless, with positive free cash flow generation and a large cash balance, we think Tesla should easily fund its growth plans in the coming years and have remaining free cash flow to return to shareholders through share repurchases if it chooses to.

Read more about Tesla’s financial strength.

Risk and Uncertainty

We assign Tesla a Very High Uncertainty Rating, as we see a wide range of potential outcomes for the company. The automotive market is highly cyclical and subject to sharp demand declines based on economic conditions. As the EV market leader, Tesla is vulnerable to growing competition from traditional automakers and new entrants. As new lower-priced EVs enter the market, the firm may be forced to continue to cut prices, reducing its industry-leading profits. With more EV choices, consumers may view Tesla less favorably.

The firm is investing heavily in capacity expansions that carry the risk of delays and cost overruns. The company is also investing in R&D to maintain its technological advantage and generate software-based revenue, with no guarantee these investments will bear fruit. Tesla’s CEO effectively owns a little more than 20% of the company’s stock and uses it as collateral for personal loans, which raises the risk of a large sale to repay debt.

Read more about Tesla’s risk and uncertainty.

TSLA Bulls Say

• Tesla could disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
• Tesla will see higher profit margins as it reduces unit production costs over the next several years.
• Tesla’s full self-driving software should generate growing profits in the coming years as the technology continues to improve, leading to increased adoption by drivers and licensing from other auto manufacturers.

TSLA Bears Say

• Traditional automakers and new entrants are investing heavily in EV development, resulting in Tesla seeing a deceleration in sales growth and being forced to cut prices due to increased competition, eroding profit margins.
• Tesla’s reliance on batteries made in China for its lower-price Model 3 vehicles will hurt sales, as these autos will not qualify for US subsidies.
• Solar panel and battery prices will decline faster than Tesla can reduce costs, resulting in little to no profits for the energy generation and storage business.

This article was compiled by Leona Murray.