Moody's Investors Service assigned a Baa3 long-term issuer rating to Tesla and withdrew the Ba1 corporate family rating, the Ba1-PD probability of default rating, as well as the SGL-1 speculative grade liquidity rating. The outlook is stable.
The Baa3 long-term Tesla rating reflects Moody's view that Tesla will maintain its position as one of the leading manufacturers of battery electric vehicles, as the company further solidifies its global footprint. Moody's anticipates that Tesla will deliver nearly 1.8 million vehicles in 2023, a 34% increase compared to the 1.3 million vehicles it delivered in 2022, and nearly double the deliveries in 2021. Considerable investments in new vehicle and battery cell production facilities enable a steep increase in vehicle deliveries.
Tesla's product offering is expanding, with early production of Cybertruck slated for later this year. The development of a next generation vehicle at a targeted 50% reduction in cost holds the prospect for a meaningful decrease in the reliance on the earnings contribution of Model 3 and Model Y.
Tesla's growing scale, regional production facilities, and heightened focus on the efficiency of its manufacturing processes support an EBITA margin that Moody's expects to be 15.8% in 2023. The margin compression relative to an industry-leading 18.9% EBITA margin last year reflects a drop in Tesla's vehicle prices, amid a more competitive offering of battery electric vehicles by other automakers, changes in tax credits across geographies, and concerns about vehicle affordability.
Moody's expects Tesla's financial policy to remain prudent. Financial leverage is well below 1 time after Tesla repaid about $10 billion of debt in the last three years. Other governance considerations are management's track record—balancing business accomplishments against notable key man risk—and close ties between members of the board and the CEO.
The stable outlook reflects Moody's expectation that Tesla will continue to capitalize on robust growth in global demand for battery electric vehicles but in an increasingly competitive environment. Further, Moody's anticipates Tesla will maintain an industry leading EBITA margin in the next 12 months, albeit still largely reliant on only two models.
Moody's anticipates that liquidity will remain very good, underpinned by a very sizeable and growing balance of cash and investments, prospects for free cash flow of more than $7 billion, and limited debt maturities in the next two years.
The rating could be upgraded if Tesla maintains a strong competitive global presence as other automakers offer an increasing number of battery electric models, and successfully broadens its product offering such that it reduces its reliance on the earnings contribution of Model 3 and Model Y. Tesla's ability to sustain an EBITA margin in the high-single digits, and a longer track record of a consistent, prudent financial policy are also important considerations for a higher rating.
The rating could be downgraded if demand for Tesla models materially softens amid an expanding offering of battery electric vehicles by other automakers, or if Tesla is unable to sustain its EBITA margin in the mid-single digits. A material shift in Tesla's financial policy that signals a greater tolerance for financial risk could also cause a ratings downgrade, including if debt/EBITDA is greater than 3 times, or if the amount of cash, investments, and committed revolver availability decreases considerably from current levels.
© 2023, Eva Fox | Tesmanian. All rights reserved.
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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.