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Stock Analyst Update

Improved Near-Term Outlook for Tesla

We're raising our fair value estimate to $570 per share from $550.


Our key takeaway from Tesla's (TSLA) second-quarter earnings was the company's ability to improve profitability through cost reductions and scale. Automotive gross profit margin excluding the sale of regulatory credits was 25.8%, up 710 basis points year on year from the 18.7% margin generated in the prior-year quarter. We had assumed Tesla would expand margins over the long term, largely due to cheaper manufacturing costs, including lower battery costs. With our long-term outlook intact, we have increased our near-term forecast to account for higher profitability. Having updated our model to reflect these changes, we raise our Tesla fair value estimate to $570 per share from $550. Our narrow moat rating is unchanged. At current prices, we view Tesla shares as slightly overvalued, with the very high uncertainty stock trading in 3-star territory, but over 15% above our fair value estimate.

In addition to gross margin expansion due to cost reductions, Tesla's operating profit margin is also beginning to benefit from operating leverage, as operating margin expanded to 11%, more than double the prior-year quarter. As delivered vehicle volumes continue to grow, overhead costs should grow at a relatively slower rate, as the company will not need as much incremental overhead for each additional vehicle sold. We expect this will be another driver of higher long-term operating profits.

During the earnings call, management said Tesla was on track to open its two newest gigafactories, in Austin, Texas, in the U.S., and in Berlin, Germany, later this year. Both factories will produce Model Y vehicles. We expect the Model Y will eventually account for the majority of Tesla sales, given SUVs are the majority of vehicles sold in Tesla's two biggest markets, the U.S. and China. A greater proportion of Model Y sales should boost Tesla's profitability as the higher priced Model Y SUV, which is built on the Model 3 sedan platform, typically generates a higher average 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.

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