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A take on Tesla

Morningstar details the fair value estimate on Tesla.

Seth Goldstein | Morningstar

Key Morningstar metrics for Tesla

  • Fair Value Estimate: $200.00
  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Very High

On April 29, Tesla (NAS: TSLA) shares rose over 15% due to multiple outlets reporting that the company cleared regulatory hurdles in China and was given tentative government approval to sell its full self-driving driver-assistance software, or FSD, in the country.

The move should drive Tesla sales higher in China, where the automaker faces increasing competition from electric vehicle manufacturers with lower prices.

Additionally, the ability to sell FSD software in a new market should drive higher adoption rates. We think Tesla’s FSD is currently a differentiator, since we view the firm as a leader in driver-assistance software. Tesla will partner with Baidu BIDU in China, using its mapping and navigation services, which should help accelerate FSD adoption there.

We already assumed Tesla would see rising sales in the remainder of the year, as we forecast a small increase in deliveries in 2024 while first-quarter deliveries fell 8.5% from the prior-year quarter. Additionally, we raised our forecast for FSD adoption. Accordingly, we maintain our $200 fair value estimate and narrow moat rating, with our outlook intact.

At current prices, we view Tesla as fairly valued, with the stock trading a little below our fair value estimate in 3-star territory. Accordingly, we recommend investors wait for a pullback in shares. Since Tesla is a high-growth stock, changes in market sentiment around its growth trajectory can disproportionately impact its price. This volatility underpins our Very High Uncertainty Rating.

Uncertainty Rating

Learn more about business risk in your portfolio and how that should inform investing decisions.

We assign Tesla a Very High Morningstar 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 subject to growing competition from traditional automakers and new entrants.

As new lower-priced EVs enter the market, Tesla may be forced to continue to cut prices, reducing the firm's 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 in an attempt to maintain its technological advantage and generate software-based revenue with no guarantee these investments will bear fruit.

Tesla’s CEO, Elon Musk effectively owns a little more than 20% of the company's 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, Tesla is 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 is unable to retain key employees, such as CEO Elon Musk, its favorable brand image could decline. Should the company not be able to retain production line employees, it could see delays. We see a low probability but moderate materiality for both risks.

Additional ESG risks include potential patent litigation as the company relies on new technology to improve its EVs and energy storage systems. We see a low probability but moderate materiality should this occur. Tesla may also face regulatory issues in some US states due to laws that require automakers and dealers to be separate. We see a moderate probability but low materiality.

Seth Goldstein, CFA, is an equity analyst for Morningstar Research Services in the US.

 

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All prices and analysis at 30 April 2024.  This information has been prepared by Morningstar Australasia Pty Limited (“Morningstar”) ABN: 95 090 665 544 AFSL: 240 892 .

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About the Author
Morningstar

Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar currently provides its clients with financial product data, indexes and information, research reports and general financial product advice through newsletters, other publications websites, data feeds and software products.