Are Tesla Shares Out of Juice?

After
Musk’s
post,
Tesla
shares
rallied,
but,
at
the
time
of
publication,
shares
in
the
company
are
down
over
32%
over
the
last
six
months,
and
28.8%
year-to-date.
The
downward
tear
is
partly
due
to
a
recent
announcement
that quarterly
year-on-year
deliveries
had
fallen
for
the
first
time
since
2020.

This
is
quite
the
turnaround
from
the
situation
a
few
years
ago,
when
Tesla
shares
were
making
fund
managers
a
lot
of
money.
In
November
2021
Tesla
shares
reached
an
all-time
high
topping
$400
(£315.28).
The
shares
traded
at
a
forward
price
to
earnings
ratio
(“P/E”)
of
98,
which
was
roughly
80%
over
the
Morningstar-assigned
Fair
Value
Estimate.

We
also
took
a
sceptical
view
of
the
company
on
an
episode
of
our
podcast
Investing
Compass
shortly
after
the
all-time
high.

What
is
Tesla’s
Business
Model?

Tesla
is
one
of
the
largest
battery
electric
vehicle
automakers
in
the
world.
In
less
than
a
decade,
the
company
went
from
a
startup
to
a
globally
recognized
luxury
automaker
with
its
Model
S
and
Model
X
vehicles.

The
company
competes
in
the
entry-level
luxury
car
and
midsize
crossover
sport
utility
vehicle
markets
with
its
Model
3
and
Model
Y
vehicles.
Tesla
also
sells
a
light
truck—the
Cybertruck,
and
a
semi
truck.
The
company
plans
to
launch
an
affordable
SUV
and
luxury
sports
car
in
the
future.

Tesla
aims
to
retain
its
market
leader
status
as
EVs
grow
from
a
niche
market
to
reaching
mass
consumer
adoption.
We
forecast
EVs
will
reach
40%
of
global
auto
sales
by
2030.
To
meet
growing
demand,
Tesla
opened
two
new
factories
in
2022,
which
increased
its
production
capacity.
Tesla
also
invests
around
4%
of
its
sales
in
research
and
development,
focusing
on
improving
its
market-leading
technology
and
reducing
its
manufacturing
costs.

Key
Morningstar
Metrics
for
Tesla
Shares

• Fair
Value
Estimate:
$195 
• Morningstar
Rating:
3
stars;
• Morningstar Economic
Moat
Rating:
Narrow;
• Morningstar Uncertainty
Rating:
Very
High.

For
EVs
to
see
mass
adoption,
they
need
to
reach
cost
and
function
parity
with
internal
combustion
engines.
To
reduce
costs,
Tesla
focuses
on
automation
and
efficiency
in
its
manufacturing
process,
such
as
reducing
the
total
number
of
parts
that
need
to
be
assembled
in
a
vehicle.
The
company
also
began
designing
its
own
batteries.
Tesla’s
goal
is
to
reduce
costs
by
over
50%.

To
reach
functional
parity,
EVs
will
need
to
have
adequate
range,
reduced
charging
times,
and
availability
of
charging
infrastructure.
Tesla’s
extended-range
EVs
are
already
at
range
parity
with
ICE
vehicles.
The
firm
also
continues
to
expand
its
supercharging
network,
which
consists
of
fast
chargers
built
along
highways
and
in
cities
throughout
the
U.S.,
EU,
and
China.
The
range
and
supercharger
network
help
eliminate
road
trip
anxiety,
or
the
functional
barrier
to
mass
market
EV
adoption.

Tesla
is
also
attempting
to
take
a
larger
share
of
its
customers’
auto-related
spending,
which
includes
selling
insurance
and
offering
paid
services
such
as
autonomous
driving
software.
It
also
sells
solar
panels
and
batteries
used
for
energy
storage
to
consumers
and
utilities.
As
the
solar
generation
and
battery
storage
market
expands,
Tesla
is
well
positioned
to
grow
accordingly.

Are
Tesla
Shares
a
Risky
Buy?

We
assign
Tesla
a
Very
High
Morningstar
Uncertainty
Rating,
as
we
see
a
wide
range
of
potential
outcomes
for
the
company.

Read
more
about
how
to
evaluate
business
risk
in
a
company.

The
automotive
market
is
highly
cyclical
and
subject
to
sharp
demand
declines
based
on
economic
conditions.
As
the
electric
vehicle
(EV)
market
leader,
Tesla
is
subject
to
growing
competition
from
traditional
automakers
and
new
entrants.
As
new
lower-priced
EVs
enter
the
market,
Tesla
may
be
forced
to
continue
to
cut
prices,
reducing
its
industry-leading
profits.
With
more
EV
choices,
consumers
may
view
Tesla
less
favourably.

The
firm
is
also
investing
heavily
in
capacity
expansions
that
carry
the
risk
of
delays
and
cost
overruns.
Likewise,
its
research
and
development
efforts
are
an
attempt
to
maintain
its
technological
advantage
and
generate
software-based
revenue,
but
there
is
little
guarantee
these
investments
will
bear
fruit.
Tesla
chief
executive
Elon
Musk
now
owns
a
little
less
than
15%
of
the
company’s
shares
and
uses
it
as
collateral
for
personal
loans,
which
itself
raises
the
risk
of
a
large
sale
to
repay
debt.

Tesla
also
faces
environmental,
social,
and
governance
(ESG)
risks.
As
a
car
manufacturer,
Tesla
is
subject
to
potential
product
defects
that
could
result
in
recalls,
including
its
autonomous
driving
software.
We
see
a
moderate
impact
should
this
occur.

But
another
risk
involves
employee
retention.
If
Tesla
is
unable
to
retain
key
employees,
such
as
Musk,
its
favourable
brand
image
could
decline.
Should
the
company
not
be
able
to
retain
production
line
employees
either,
it
could
see
delays.
We
see
a
low
probability
but
moderate
materiality
for
both
risks.

Additional
ESG
risks
include
potential
patent
litigation
as
the
company
relies
on
new
technology
to
improve
its
EVs
and
energy
storage
systems.
We
see
a
low
probability,
but
moderate
materiality
should
this
occur.
Tesla
may
also
face
regulatory
issues
in
some
US
states
due
to
laws
that
require
automakers
and
dealers
to
be
separate.
Again,
we
see
a
moderate
probability
but
low
materiality.

Read
our
February
Analysis:
Should
I
Buy
Tesla
Shares
After
Earnings?

Are
Shares
in
Tesla
Cheap
Now
They’ve
Fallen?

Our
Fair
Value
Estimate
for
Tesla
is
$195
per
share.
In
2024,
we
forecast
Tesla’s
deliveries
would
be
roughly
flat,
versus
1.8
million
in
2023.
We
forecast
lower
average
selling
prices
as
Tesla
will
likely
have
to
cut
prices
in
key
markets,
such
as
China,
in
line
with
peers.
We
also
forecast
automotive
gross
margins
will
be
18%
in
2024,
in
line
with
2023
results.

Longer
term,
we
assume
Tesla
delivers
a
little
over
five
million
vehicles
per
year
in
2030.
This
includes
fleet
sales,
which
are
an
expanding
opportunity
for
the
company.
Our
forecast
is
well
below
management’s
aspirational
goal
of
selling
20
million
vehicles
by
the
end
of
this
decade.
However,
it
is
nearly
three
times
the
1.8
million
vehicles
delivered
in
2023.

Our
forecast
assumes
Tesla
slightly
grows
its
Model
3
and
Model
Y
deliveries
and
ramps
up
volumes
of
the
light
truck,
named
the
Cybertruck,
to
around
100,000
deliveries
per
year –
far
below
management’s
goal
of
250,000.

We
forecast
Tesla
will
launch
its
affordable
SUV
with
initial
deliveries
coming
in
late
2025,
and
a
ramp
up
in
2026
at
a
pace
similar
to
the
Model
3
ramp
up
in
2018,
the
first
full
year
the
vehicle
was
sold.
We
think
deliveries
of
the
affordable
SUV
will
exceed
those
of
the
Model
Y
and
Model
3,
as
the
lower
price
point
should
attract
a
larger
consumer
base.

We
think
Tesla
will
be
successful
in
continuing
to
reduce
its
manufacturing
costs
on
a
per
vehicle
basis.
We
forecast
segment
gross
margins
will
recover
to
the
mid-20%
range
by
the
end
of
the
decade,
well
above
the
19%
level
generated
in
2023,
but
below
the
29%
margin
achieved
in
2022.

Addtionally,
we
assume
revenue
growth
and
margin
expansion
from
autonomous
software
sold
on
a
subscription
basis.
We
also
assume
the
successful
growth
of
the
insurance
business
and
increased
profits
from
the
charging
business
result
in
long-term
profit
growth
and
margin
expansion
in
the
services
and
other
segment.

In
energy
generation
and
storage,
we
assume
the
business
averages
over
a
20%
annual
growth
rate
during
our
10-year
forecast,
primarily
driven
by
accelerating
demand
for
energy
storage
systems.

While
we
forecast
ESS
prices
to
decline,
the
fall
will
largely
be
driven
by
cheaper
battery
costs,
which
should
not
affect
profitability.
As
volume
grows,
unit
costs
should
fall.
Combined
with
recurring
revenue
from
long-term
power
purchase
agreements
and
AI
trading
software,
we
expect
the
business
will
turn
profitable
and
generate
gross
margins
in
line
with
peers
such
as
Enphase
and
SolarEdge.

Additionally,
we
assume
Tesla’s
overhead
expenses
continue
to
decline
as
a
percentage
of
sales
as
the
company
benefits
from
operating
leverage
as
deliveries
grow.
As
a
result,
we
forecast
companywide
operating
margins
will
return
to
the
mid-teens
levels
by
the
end
of
the
decade
in
line
with
the
17%
achieved
in
2022,
and
well
above
the
9%
margin
in
2023.

To
fund
this
growth,
we
assume
Tesla
will
need
to
spend
over
$100
billion
in
capital
expenditures
over
the
next
decade.
Our
base
case
also
adds
the
present
value
of
Tesla’s
autonomous
vehicle
ride-hailing
(robotaxi)
business,
which
accounts
for
roughly
7%
of
our
total
valuation.
This
figure
assumes
Tesla
captures
a
2.5%
market
share
across
the
combined
markets
of
the
US,
European
Union,
and
China,
and
charges
$0.75
per
mile.
Finally,
we
add
the
present
value
of
Dojo’s
artificial
intelligence
training
services
and
the
present
value
of
humanoid
robot
sales,
which
accounts
for
less
than
1%
of
our
total
valuation
combined.

Tesla:
What
Else
Could
Happen?

Given
the
wide
range
of
outcomes
for
Tesla,
we
also
model
additional
scenarios.
Our
downside
scenario
fair
value
estimate
is
$90
per
share.
In
a
downside
scenario,
we
assume
Tesla
delivers
under
four
million
vehicles
in
2030.
We
also
assume
cost
reductions
do
not
materialise
as
planned
and
Tesla
is
forced
to
cut
prices
amid
increasing
competition.

This
keeps
gross
profit
in
the
high
teens
to
low-20%
range,
in
line
with
the
19%
generated
in
2023.
We
also
assume
Tesla
gets
no
benefit
from
autonomous
driving
software
and
sees
slower
growth
in
the
insurance
business.
Finally,
in
this
scenario,
we
assign
no
value
to
the
company’s
ancillary
businesses,
including
robotaxi,
Dojo’s
AI
training
services,
and
humanoid
robots.

Our
upside
scenario
fair
value
estimate
is
$400
per
share.
In
an
upside
scenario,
we
assume
Tesla
delivers
over
9
million
vehicles
per
year
by
2030
and
the
company
further
benefits
from
cost
reductions
in
excess
of
our
base-case
forecast.
We
also
assume
greater
adoption
of
autonomous
driving
software
and
faster
growth
in
the
insurance
business.

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