Tesla Stock Valuation
I believe Tesla stock (NASDAQ:TSLA) is slightly overvalued compared to my long-term fair value estimate of $215 per share. My valuation factors in a weighted average cost of capital of just under 9% and includes the addition of nonrecourse and non-dilutive convertible debt.
In the short term, I anticipate Tesla’s annual total vehicle deliveries to reach around 1.8 million in 2023, representing a 37% increase compared to 2022. However, due to aggressive price cuts surpassing cost savings, I project a contraction in automotive gross margins to 19% in 2023 from the 29% achieved in 2022.
Looking further ahead, my forecast assumes Tesla will deliver approximately 5 million vehicles annually by 2030, including fleet sales. While my projection falls well short of Tesla’s aspirational goal of 20 million vehicles, it represents a substantial increase from the 1.31 million vehicles delivered in 2022. I anticipate the expansion of Model Y deliveries and successful launches of the light truck, sports car, semi-truck, and affordable sedan and SUV platforms. Moreover, I expect Tesla to continue reducing manufacturing costs per vehicle, leading to an expansion of segment gross margins to around 31%.
Tesla stock has gained 132$ year-to-date.
When analyzing Tesla’s Q3 earnings report, I’ll focus on three critical areas:
Automotive Profit Margins: Understanding how Tesla’s strategy of reducing prices to stimulate demand impacts its profits is vital. I expect to see a decline in profit margins during the second half of the year compared to the first. Assessing the effects of price reductions will help us adjust mu profit forecasts for the automotive segment accordingly.
Energy Generation and Storage Profits: While the automotive segment remains Tesla’s primary revenue source, the energy generation and storage (EG&S) segment is gaining momentum. EG&S became profitable last year and has experienced substantial growth in 2023, primarily driven by increased sales of energy storage solutions. I anticipate this segment evolving into a significant secondary source of profits as the market for stationary energy storage continues to expand.
New Products and Services: I’ll closely watch for any insights from Tesla’s management regarding upcoming products and services, notably the Cybertruck and full self-driving software. The Cybertruck, long-awaited by enthusiasts, will introduce a fifth vehicle to Tesla’s lineup, potentially driving increased sales volume. Full self-driving software represents a substantial ancillary revenue source for Tesla, with the potential to generate income from every vehicle sold once the complete software version is rolled out. Updates from management will be crucial in gauging the progress towards these goals.
Economic Moat Rating
I award Tesla a “narrow moat” based on its intangible assets and cost advantages. Tesla’s strong brand as a luxury automaker commands premium pricing, while its expertise in electric vehicle manufacturing enables cost-effective production. The brand’s cachet is likely to persist as Tesla keeps innovating and expanding into various market segments, generating continued consumer demand.
Tesla’s cost advantage in EV production is driven by manufacturing scale, with its average cost of goods sold per vehicle decreasing significantly while gross profit margins expand. Tesla’s aggressive plans to reduce battery cell costs further solidify its cost advantage. This may make it challenging for incumbent automakers to catch up, as building new factories from scratch is a time-consuming process.
While I expect Tesla’s moat to persist and generate excess returns on capital for at least the next 20 years, the second 10-year period is uncertain due to rapid advancements in autonomous vehicle technologies, which could reshape the automotive industry. Hence, I consider a “narrow moat” rating with a 10-year excess return duration as more suitable.
Risk and Uncertainty
Key risks include:
Cyclical Market: The automotive market is highly cyclical and susceptible to economic fluctuations, potentially affecting demand for Tesla’s vehicles.
Competition: As the EV market leader, Tesla faces growing competition from traditional automakers and new entrants. Lower-priced EVs from competitors may necessitate ongoing price reductions, impacting Tesla’s profits.
Capacity and R&D Investments: Tesla’s heavy investments in capacity expansion and research and development pose risks of delays and cost overruns.
Technological Advancements: The rapid evolution of autonomous vehicle technologies presents uncertainties for both Tesla and the broader automotive industry.
ESG Risks: Environmental, social, and governance risks, including potential product defects and employee retention issues, can impact Tesla’s brand image and operations.
In conclusion, Tesla’s Q3 earnings report will provide essential insights into the company’s financial performance and strategic outlook. Monitoring these key areas and understanding the associated risks will be crucial for investors and analysts.
Featured Image: Unsplash @ Reet Talreja
