After Earnings, Is Tesla Stock a Buy, a Sell, or Fairly Valued?

Tesla TSLA announced its second-quarter earnings results on July 23. Here’s Morningstar’s take on Tesla’s earnings and the outlook for its stock.

Key Morningstar Metrics for Tesla

What We Thought of Tesla’s Q2 Earnings

• Tesla is currently between growth projects as it develops its more affordable vehicle. Our thesis is that this vehicle will launch by the end of 2025, generating solid deliveries growth in 2026. We were pleased to hear management maintain its 2025 release date, though it offered no details on the vehicle.
• Tesla is working to improve its full self-driving software, which is currently in supervised mode, in which drivers must be ready to take over at any time. Management revealed its plan to improve FSD until it can go into unsupervised mode. After further improvement, Tesla will look to enable its robotaxi software, wherein customers can allow their vehicles to join the robotaxi fleet in their city. Ultimately, we think an improving FSD product will drive more consumers to choose Tesla over competitors.
• Tesla’s energy generation and storage business posted record segment gross profits of $740 million during the second quarter, at nearly a 25% margin. We view it as Tesla’s fastest-growing segment over the next decade, and forecast revenue will grow at roughly a 30% compound average rate, making it increasingly important to the firm’s overall results.
• Tesla shares sold off following earnings as the company posted weak second-quarter earnings and management offered few timelines or details for when profits will rebound. However, the stock still trades above our $200 fair value estimate. While shares are in 3-star territory, we recommend investors wait for a larger pullback before seeking an entry point.

Fair Value Estimate for Tesla Stock

With its 3-star rating, we believe Tesla’s stock is fairly valued compared with our long-term fair value estimate of $200 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse 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 5 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 3 times the 1.8 million vehicles delivered in 2023.

Read more about Tesla’s fair value estimate.

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.

Tesla will face increasing competition in the coming years. Automakers plan to electrify their fleets by adding EV versions of existing vehicles and creating new platforms. However, we see EVs becoming a greater proportion of auto sales, growing to 30% by 2030, up from 3% in 2020, which will expand the market as they rapidly take share from internal combustion engine vehicles. As new models are introduced, Tesla’s technological advantage and the strength of its brand will remain intact, letting it continue to charge premium prices for its EVs.

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 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 Krutang Desai.