Tesla Posts Strong Q4, But It’s Still Overpriced

Having updated our model to incorporate Tesla's TSLA detailed fourth-quarter and full-year results, we are maintaining our $700 fair value estimate and narrow moat rating. Our near-term outlook is largely unchanged, as we continue to forecast Tesla will deliver over 1.5 million vehicles in 2022. However, we have reduced our medium-term growth assumptions. We see the affordable sedan and SUV vehicle platform being delayed as management prioritizes the completion of other new vehicles first. Our long-term outlook for Tesla--which assumes the company reduces its cost of goods sold through cheaper batteries and manufacturing efficiencies--is unchanged. Separately, we have incorporated our updated U.S. corporate tax rate assumption, which offset the valuation impact of the delay in the launch of the affordable vehicle platform. At current prices, we view Tesla shares as overvalued, trading in 2-star territory. We think the market continues to price in a scenario where Tesla becomes a top-three automaker in global vehicles sold by 2030. As such, although the stock is down roughly 25% from its 52-week high, we still think the current valuation is expensive. In addition to management saying it would delay the affordable vehicle platform, our other key takeaway from Tesla's results was that the company is likely to face near-term cost increases exceeding recent price increases, which confirmed our prior thinking. We see higher costs coming from higher raw materials and the startup of two new manufacturing plants, one in Austin, Texas, and the other in Berlin. While we forecast Tesla will see gross margins compress in 2022, we think this will be temporary and expect gross margin expansion to resume in 2023. Over the long term, we forecast automotive gross margins will expand from over 29% in 2021 to nearly 39% by 2031. The expansion will be driven by lower manufacturing and the growth of high-margin autonomous driving software.

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