Tesla: Shares Fall Following US Midterm Election Results; Maintaining Valuation

Key Morningstar Metrics for Tesla

• Fair Value Estimate: $475
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

The Wall Street Journal reported that the Democratic Party will take control of the US House of Representatives and Senate following the Nov. 3 election. In Texas, the Democrats won the governor’s race and are leading in the state House race, while the Republican Party retained state Senate control.

Why it matters: Tesla TSLA shares were down 6% at the time of writing on Nov. 4 as the market reacted to the election results. We think the market fears Democrats will look to target Tesla, as Tesla CEO Elon Musk heavily campaigned for the Republican Party leading up to the election.

• Given that US President Donald Trump will remain in office through 2028 and that he could veto any new legislation, we don’t expect any new laws to pass that would negatively affect Tesla. Still, we see headline risk to Tesla shares from bills being filed or statements being made over the next two years.
• The largest impact could be on autonomous vehicles. However, the US Department of Transportation, which is under the executive branch, is updating the Federal Motor Vehicle Safety Standards for autonomous vehicles. Once finalized, this should allow AVs to continue to move forward.

The bottom line: We maintain our $475 fair value estimate per share for narrow-moat Tesla. At current prices, we view Tesla shares as undervalued, with the stock trading around 20% below our fair value estimate, which puts shares in between 3- and 4-star territory given our Very High Morningstar Uncertainty Rating.

• We don’t see a major impact to Tesla from the Democrats taking control of the US Congress. In Texas—the location of Tesla’s headquarters—the incoming governor campaigned against the state offering tax breaks and other incentives to Tesla, so we think that could end, but we don’t expect a large impact to Tesla’s current operations.