Tesla TSLA stock earns a Buy and fair value estimate of $220 from Morningstar. The ratings agency's updated analysis suggests that the producer's share price is now too low.
Morningstar, in its updated analysis (posted in full below), highlights that Tesla is one of the largest electric vehicle manufacturers in the world, having gone from start-up to globally recognized automotive manufacturer in less than a decade, offering luxury vehicles in key segments. Tesla also plans to sell new vehicles over the next few years, including a light truck, semi-trailer, sports car, and an affordable sedan and SUV. Tesla aims to maintain its status as a market leader as electric vehicles move from a niche market to mainstream consumer adoption. To meet growing demand, Tesla opened two new factories in 2022 and plans more in the coming years. Tesla invests about 5% of its sales revenue in research and development, with a focus on improving advanced technologies and reducing manufacturing costs.
Key Morningstar Metrics for Tesla
Fair Value Estimate: $220
Star Rating: 5 Stars
Economic Moat Rating: Narrow
Moat Trend Rating: Stable
Economic Moat Rating
Tesla’s narrow economic moat is 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 allows the company to make its vehicles cheaper than its competitors. Tesla’s brand cachet is not likely to be impaired anytime soon, because we expect the company to keep innovating to stay ahead of startup and established competitors. Tesla’s proprietary technology contributes to its intangible asset-driven competitive advantage. We think Tesla benefits from a cost advantage in EV production thanks to its manufacturing scale. Legacy automakers are gradually transitioning to BEV production from internal combustion engines, but we expect they will be saddled with legacy ICE costs for a long time.
Fair Value Estimate for Tesla Stock
Our fair value estimate is $220 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse and nondilutive convertible debt. Our valuation assumes Tesla increases its annual total vehicle delivery volume to roughly 5.1 million by 2031. This includes fleet sales, an expanding opportunity for Tesla. Our forecast is well below management’s aspirational goal of selling 20 million vehicles by the end of this decade, but it is nearly 4 times the 1.31 million vehicles delivered in 2022. We think Tesla will be successful in continuing to reduce its manufacturing costs on a per vehicle basis. We forecast gross margins will expand to roughly 36% from the 29% achieved in 2021, generating automotive profit growth in excess of revenue growth.
Risk and Uncertainty
We see a wide range of potential outcomes for Tesla. Electric vehicles could remain a niche segment if mass-market consumers don’t adopt the new powertrain technology due to higher costs and worse function. EVs could also be disrupted by other powertrain technologies. The automotive market is highly cyclical and subject to sharp demand declines based on economic conditions. As EV competition grows from traditional automakers and new entrants, consumers may have more choices and 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 in an attempt to maintain its technological advantage with no guarantee these investments will bear fruit. Tesla CEO Elon Musk owns a little over 13% of the company’s stock and uses it as collateral for personal loans, which raises the risk of a large sale to repay debt.
Tesla Bears Say
- Traditional automakers are investing heavily in EV development, which could result in Tesla losing market share and seeing a deceleration in sales growth due to increased competition.
- EV adoption is driven largely by government initiatives, such as regulations and subsidies, which will limit long-term market growth for Tesla.
- Solar panel and battery prices may decline faster than Tesla can reduce costs, resulting in little to no profits for the energy generation and storage business.
Tesla Bulls Say
- Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, autonomous vehicles, batteries, and solar generation systems.
- Tesla could see higher profit margins as it reduces unit production costs over the next several years.
- Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market.
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This article is for informational purposes only. You should not construe any such information or other material as an investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Eva Fox, Tesmanian, or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
Eva Fox holds zero shares of Tesla, Inc., and currently (at the time of this article's publishing) holds zero options or securities in Tesla Inc. and/or its affiliates.
About the Author
Eva Fox joined Tesmanian in 2019 to cover breaking news as an automotive journalist. The main topics that she covers are clean energy and electric vehicles. As a journalist, Eva is specialized in Tesla and topics related to the work and development of the company.