Tesla TSLA is set to release its fourth-quarter earnings report on Jan. 29. Here’s Morningstar’s take on what to look for in Tesla’s earnings and stock.
Source: Morningstar Direct.
Fair Value Estimate for Tesla
With its 1-star rating, we believe Tesla’s stock is significantly 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 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 guidance for 20%-30% growth.
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, 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 Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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