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Stock Analyst Update

Raising Tesla's FVE on Improved Profitability Outlook

The increased fair value estimate comes from our outlook for higher long-term profitability in the automotive segment.

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After taking a fresh look at Tesla (TSLA), we are raising our fair value estimate to $550 per share from $354. The increased fair value estimate comes from our outlook for higher long-term profitability in the automotive segment. We maintain our narrow moat rating but downgrade our moat trend rating to stable from positive. The rating change comes from our view for offsetting trends over the next five years. We see Tesla's brand-related intangible asset moat source strengthening but see this being offset by a weakening cost advantage. While we think Tesla will continue to drive down its own supply costs, other automakers' EV unit production costs should fall by a larger dollar amount, albeit from a much higher starting point.

We maintain an exemplary capital allocation rating and a very high uncertainty rating. At current prices, we view shares as slightly overvalued, with the stock trading above our fair value estimate but within 25% of our fair value estimate, which is the upper end of the range for 3-star territory based on our uncertainty rating.

Our increased outlook for automotive profits comes from increased vehicle deliveries, higher average vehicle prices, and lower unit production costs. We forecast a little over 5.1 million vehicles sold in 2030, up from 4.3 million, due to a greater number of affordable vehicles, which Tesla nicknamed the $25,000 car. We see higher average prices due to a mix shift in vehicles sold. In 2020, the Model 3 sedan accounted for the majority of volumes. However, Tesla plans to sell more higher-priced Model Y SUVs. Eventually, we expect the Model Y will generate the majority of vehicle volumes.

We see management’s cost reduction initiatives driving long-term gross margin expansion. In its September Battery Day event, Tesla unveiled plans to reduce battery costs by 56%. We think Tesla will be able to achieve these cost reductions, without reducing prices, which will reduce vehicle unit costs and increase gross profit per vehicle. 

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Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.