Skip to Content
Stock Analyst Update

Improved Near-Term Outlook for Tesla

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

Mentioned:

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.

 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.