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

Tesla TSLA is set to release its first-quarter earnings report on April 23. Here’s Morningstar’s take on what to look for in Tesla’s earnings and stock.

Key Morningstar Metrics for Tesla

• Fair Value Estimate: $195.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

Earnings Release Date

• Tuesday, April 23, after the close of trading

What to Watch for In Tesla’s Q1 Earnings

• Automotive gross profit margins: Management has shifted its 2024 strategy to focus on preserving unit profits. This marks a change from 2023, when the firm cut prices to grow auto delivery volumes. We will see how this strategic change affects automotive gross profit margins, and whether margins are closer to fourth-quarter numbers of around 19% or experience a sizeable decline.
• Strategy update: A Reuters article cited three sources who said Tesla plans to cancel its affordable vehicle and focus on developing autonomous driving software to launch robo-taxis. CEO Elon Musk disputed this claim. During the fourth-quarter earnings call, management said the vehicle would usher in Tesla’s next wave of delivery growth. We hope the company clarifies whether it will move forward with the affordable car.
• FSD update: A key part of Tesla’s strategy is developing Level 3 “full self-driving” software, meaning a car using the software would generally drive itself, with limited need for a driver to step in. As this technology continues to improve, we hope to hear from management about when it may be ready to roll out and begin generating monthly subscription revenue.
• Energy generation and storage profits: While Tesla is known for its vehicles, its energy generation and storage business is also a market leader. In 2023, the segment generated a gross profit of over $1.1 billion. Tesla reported a 4% year-over-year increase in storage deployed during the first quarter. We expect this space to see faster-growing profits than the automotive segment in the coming years.

Fair Value Estimate for Tesla Stock

With its 3-star rating, we believe Tesla’s stock is fairly valued compared with our long-term fair value estimate of $195 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse and non-dilutive convertible debt.

In 2024, we forecast Tesla’s deliveries will be roughly flat, versus 1.8 million in 2023. We forecast lower average selling prices, as Tesla will likely have to cut prices in key markets like China, in line with peers. We forecast automotive gross margins will be 18% in 2024, in line with 2023 results.

We think Tesla will successfully continue reducing per-vehicle manufacturing costs. We forecast segment gross margins will recover to the mid-20% range by the end of the decade, well above the 19% in 2023 but below the 29% in 2022.

Read more about Tesla’s fair value estimate.

Economic Moat Rating

We award Tesla a narrow moat, stemming from 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 vehicles more cheaply than competitors.

Read more about Tesla’s economic moat.

Financial Strength

Tesla is in excellent financial health. Cash, cash equivalents, and investments stood at $29.1 billion and far exceeded total debt as of Dec. 31, 2023. Total debt was around $4.6 billion, but total debt excluding vehicle and energy product financing (nonrecourse debt) was less 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 have the ability to fund its growth plans in the coming years and have remaining free cash flow to return to shareholders through share repurchases if the company chooses to do so in the future.

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 subject to growing competition from traditional automakers and new entrants. As new lower-priced EVs enter the market, Tesla may be forced to continue to cut prices, reducing its industry-leading profits. With more EV choices, consumers may view the firm less favorably.

Tesla 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 owns a little less than 15% 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.
• Thanks to its industry-leading technology and unique supercharger network, Tesla’s EVs offer the best function on the market, which should help the company maintain its market-leader status as EV adoption increases.

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 they 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.