Raising Our Fair Value for Tesla on Near-Term Outlook

Tesla TSLA reported strong first-quarter earnings. Adjusted EBITDA was up nearly 23% sequentially versus the fourth quarter of 2021 even as vehicle deliveries were roughly flat. The quarter exemplified our long-term thesis that Tesla has the ability to raise prices, and reduce unit production costs and overhead expenses, all of which will drive higher profits. While our vehicle sales outlook is largely unchanged, we have decreased our near-term overhead expense assumption as Tesla's ability to scale occurred faster than we had expected. We have also increased our average selling price for 2022 to incorporate higher prices. Having updated our model to reflect these changes, we raise our Tesla fair value estimate to $750 per share from $700. Our narrow moat rating is unchanged.

Tesla shares were up 6% in after-hours trading. At current prices, we view Tesla shares as overvalued with the stock trading in 2-star territory.

Tesla reported automotive gross margin excluding regulatory credit sales of 30% during the quarter, the first quarter in the company's history to achieve at least 30%. This highlights our long-term thesis that Tesla will be able to continue expanding profit margins due to manufacturing efficiencies. However, we expect it will take some time for the company to achieve our long-term automotive gross profit forecast of nearly 38%.

In the remainder of 2022, we forecast gross profit margins will likely come in lower than the first quarter due to startup costs associated with the opening of two new factories, one in Berlin, Germany and one in Austin, Texas in the U.S., which had a negligible impact on first-quarter results. The Berlin factory opened in the last week of March, and the Austin factory did not open until April. Further, we think coronavirus-related shutdowns at the Shanghai factory will likely weigh on second-quarter profits. However, we view all of these as temporary issues that should not affect the company's long-term profitability.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.