Tesla TSLA reported its fourth-quarter earnings on Jan. 29. Here is Morningstar’s take on Tesla’s results and the outlook for the stock.
Key Morningstar Metrics for Tesla
- Fair Value Estimate: $250.00
- Morningstar Rating: ★★
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: Very High
What We Thought of Tesla’s Q4 Earnings
Tesla shares were up 4% in after-hours trading as management reported progress in its autonomous driving software and maintained the timeline for launching more affordable vehicles later this year.
Why it matters: Tesla aims to transform the firm from primarily producing autos to becoming a real-world artificial intelligence provider. Tesla also aims to develop fully autonomous driving software that will enable a robotaxi service.
- Tesla is a high-growth stock, having become the first profitable electric vehicle producer globally. With management’s goal of a robotaxi service, shares tend to be volatile and move based on management’s progress toward the successful development of autonomous driving software.
- With the first robotaxi launch planned in June 2025, Tesla is making meaningful progress toward its long-term autonomous driving goals.
The bottom line: We raise our fair value estimate to $250 per share from $210. The increase is due to our assumptions for higher autonomous driving software adoption and faster growth in the energy generation and storage business.
- At current prices, we view Tesla shares as overvalued with the stock trading around 60% above our updated fair value estimate. We recommend investors wait for a pullback in shares before considering an entry point.
Big picture: We credit the progress management has made in improving its autonomous driving software. However, autos remain the firm’s core business. Automotive gross profit margins excluding credits fell sequentially to the midteens, from 20% in the third quarter.
- We think Tesla will need to keep reducing prices in key markets such as China where it will face increased competition. This will keep margins below management’s 20% goal over the next several years.
- While we see a return to delivery growth in 2025, we expect it will largely come from the new more affordable vehicle version using the Model Y platform. As production of this vehicle ramps up, we expect it will weigh on profits in 2025.
Tesla Stock Price
Source: Morningstar Direct.
Fair Value Estimate for Tesla
With its 2-star rating, we believe Tesla’s stock is significantly overvalued compared with our long-term fair value estimate of $250 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse and nondilutive convertible debt. In 2024, Tesla’s deliveries came in at 1.79 million, slightly below the 1.81 million achieved in 2023. In 2025, we forecast deliveries will return to growth as the affordable vehicle is launched by midyear. However, we forecast deliveries will come in below management’s long-term goal of 20%.
Read more about Tesla’s fair value estimate.
Tesla Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct.
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.
We see the potential for Tesla to outearn its cost of capital over at least the next 20 years, which is the measurement we use for a wide moat rating. However, the second 10-year period carries significant uncertainty for both Tesla and the broader automotive industry, given the rapid advancement of autonomous vehicle technologies, which could transform how consumers use vehicles. As such, we view a narrow moat rating, which assumes a 10-year excess return duration, as more appropriate.
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, which should result in Tesla seeing a deceleration in sales growth and being forced to cut prices due to increased competition, eroding profit margins.
- Tesla’s large investment into autonomous driving software could be value-destructive as the robotaxi product will face delays and competition from Waymo, which already offers a robotaxi service.
- Tesla’s energy generation and storage business will see increased competition from battery producers that are willing to take lower profits to win market share.
This article was compiled by Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
