Going into Earnings, is Tesla Stock a Buy, Sell or a Hold?

Affordable
Vehicle
Update

Management
confirmed
it
is
working
on
a
lower-priced
vehicle,
which
we
expect
will
begin
to
sell
by
the
end
of
2025.
We
will
look
for
an
update
on
the
vehicle’s
price,
timing,
and
specs.
Our
thesis
is
that
this
vehicle
will
generate
the
next
wave
of
deliveries
growth
for
Tesla,
so
we
will
see
if
our
forecast
for
larger
deliveries
growth
in
2026
remains
on
track.

Full
Self-Driving
Software
Update

In
our
view,
FSD-assisted
software
can
be
a
differentiator
in
encouraging
a
consumer
to
buy
a
Tesla
versus
other
luxury
autos.
We
will
look
for
an
update
from
management
on
FSD
adoption.
However,
with
next
month’s
Robotaxi
event,
management
may
prefer
to
wait
to
share
these
details.

Energy
Generation
and
Storage

Management
expects
this
business
to
grow
at
least
75%
in
2024
versus
2023,
largely
driven
by
Megapack
(larger
batteries)
demand.
While
we
already
know
Tesla
delivered
a
record
9.4GWh
of
energy
storage
products
in
the
second
quarter,
we
will
see
how
this
segment’s
profits
and
profit
margins
ended
with
the
record
volumes.
Our
thesis
is
that
this
business
will
become
increasingly
important
to
Tesla’s
total
profits
over
the
next
several
years,
as
it
will
generate
faster
profit
growth
than
the
automotive
business.

Key
Morningstar
Metrics
for
Tesla

• Fair
Value
Estimate:
$200.00
• Morningstar
Rating:
3
stars
• Morningstar
Economic
Moat
Rating:
Narrow
• Morningstar
Uncertainty
Rating:
Very
High

Fair
Value
Estimate
for
Tesla

With
its
3-Star
rating,
we
believe
Tesla’s
stock
is
fairly
valued
compared
with
our
long-term
fair
value
estimate
of
$200
(£154.02)
per
share.
We
use
a
weighted
average
cost
of
capital
of
just
under
9%.
Our
equity
valuation
adds
back
non-recourse
and
non-dilutive
convertible
debt.
We
believe
Tesla’s
deliveries
will
be
slightly
higher
in
2024
than
the
1.81
million
in
2023.
We
anticipate
lower
average
selling
prices,
as
the
company
will
likely
have
to
cut
prices
in
key
markets
like
China,
in
line
with
peers.
We
forecast
automotive
gross
margins
will
be
19%
in
2024,
in
line
with
2023
results.

In
the
longer
term,
we
assume
Tesla
will
deliver
nearly
five
million
vehicles
per
year
in
2030.
This
includes
fleet
sales,
an
expanding
opportunity
for
the
firm.
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.

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.

By
focusing
on
the
luxury
auto
market
first,
Tesla
generated
tremendous
publicity.
This
encouraged
strong
demand
for
its
subsequent
cheaper
vehicles,
such
as
the
Model
3
and
Model
Y.
As
other
new
vehicles
are
launched,
such
as
the
Cybertruck
or
the
platform
that
will
produce
the
affordable
SUV
(known
as
the
$25,000
vehicle),
we
expect
the
company’s
strong
brand
will
continue
encouraging
demand.

Tesla’s
proprietary
technology
contributes
to
its
competitive
advantage.
This
form
of
intangible
assets
applies
to
EVs
due
to
their
innovative,
highly
engineered
nature,
and
because
patents
for
EV
technologies
hold
somewhat
less
value
since
competitors
can
create
similar
products.
Since
launching
the
Model
S
in
2012,
Tesla
has
been
the
industry
leader
in
electric
vehicles.
The
company
invests
nearly
6%
of
sales
in
R&D,
well
ahead
of
the
competition
on
a
miles-per-kilowatt-hour
basis,
and
it
continues
to
improve
other
vehicle
specs
such
as
power.
Tesla
is
also
investing
heavily
in
its
proprietary
autonomous
vehicle
technology
and
building
one
of
the
world’s
largest
supercomputers
to
train
self-driving
artificial
intelligence.
We
think
the
firm
will
maintain
its
proprietary
technological
advantage.

Read
more
about
Tesla’s
economic
moat

Financial
Strength

Tesla
is
in
excellent
financial
health.
Cash,
cash
equivalents,
and
investments
stood
at
$26.9
billion
and
far
exceeded
total
debt
as
of
March
31,
2024.
Total
debt
was
around
$4.8
billion,
while
total
debt
excluding
vehicle
and
energy
product
financing
(nonrecourse
debt)
was
a
little
more
than
$50
million.

Tesla
has
historically
used
credit
lines,
convertible
debt
financing,
and
equity
offerings
to
raise
capital
to
fund
its
growth
plans.
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
favourably.

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.

Tesla
faces
environmental,
social,
and
governance
risks.
As
an
automaker,
it’s
subject
to
potential
product
defects
that
could
result
in
recalls,
including
its
autonomous
driving
software.
We
see
a
moderate
impact
should
this
occur.
Another
risk
involves
employee
retention.
If
Tesla
can’t
retain
key
employees
like
CEO
Elon
Musk,
its
favourable
brand
image
could
decline.
Should
the
company
be
unable
to
retain
production
line
employees,
it
could
see
delays.
We
see
a
low
probability
but
moderate
materiality
for
both
risks.

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
Renee
Kaplan

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