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

Tesla released its third-quarter earnings report on Oct. 23. Here’s Morningstar’s take on Tesla’s earnings and stock.

Key Morningstar Metrics for Tesla

• Fair Value Estimate: $210.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Tesla’s Q3 Earnings

• Tesla deliveries are down through the first three quarters of the year, but the firm saw growth in the third quarter. If deliveries grow a little more than 6% in the fourth, the firm could achieve growth for the year. We think the 2024 guidance is achievable and expect Tesla will provide incentives (lower interest rates, free charging, etc.) to boost deliveries growth in the fourth quarter. However, we think the firm’s 2025 guidance for 20%-30% growth is overly optimistic, and we forecast far smaller growth.
• Tesla’s automotive gross profit margins expanded to 20.1% in the third quarter, up from 18.5% in the first and second quarters. In our view, the primary growth driver was lower unit production costs, as Tesla benefitted from operating leverage that resulted from increased production and lower raw materials costs. The company also benefitted from higher autonomous driving software revenue and increased regulatory credits versus a year ago. In our view, the results signal Tesla’s margins likely bottomed in the first half of the year.
• Tesla maintained its timeline for a more affordable vehicle to enter production in the first half of next year. While management did not share many details, they said the goal is for the vehicle to be priced at less than $30,000 in the United States after incentives. We think this signals it will be priced in the mid-$30,000 range, as Tesla will likely target the vehicle qualifying for the full $7,500 US EV subsidy. We think this vehicle will generate double-digit deliveries growth as production ramps up in 2026.
• We raised our fair value estimate to $210 per share from $200 following the strong earnings, due to our improved near-term outlook for Tesla’s automotive business and higher forecast for its energy generation and storage business. Tesla shares rallied following earnings as market sentiment shifted to become more positive. At current prices, we view Tesla’s stock as slightly overvalued, with shares trading a little less than 30% above our fair value estimate.

Fair Value Estimate for Tesla

With its 2-star rating, we believe Tesla’s stock is overvalued compared with our long-term fair value estimate of $210 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. We believe Tesla’s 2024 deliveries will be slightly higher in 2024 than the 1.81 million in 2023. We anticipate 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 just under 20% in 2024, slightly above 2023 results.

In the longer term, we assume Tesla will deliver nearly 5 million vehicles per year in 2030. This includes fleet sales, an expanding opportunity for the firm. Our forecast is well below management’s aspirational goal of selling 20 million vehicles by the end of this decade. However, it is nearly 3 times the 1.8 million vehicles delivered 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 were over $33.6 billion and far exceeded total debt as of Sept. 30, 2024. Total debt was around $7.4 billion, while total debt excluding vehicle and energy product financing (nonrecourse debt) was a little over $10 million.

To fund its growth plans, Tesla has historically used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. We think this makes sense, as funding massive growth solely through debt adds additional risk in a cyclical industry.

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 its 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 Tesla 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 cutting 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 Sokhoeun Noeut.