Tesla TSLA reported its “best year ever on every level” for the full year 2022 and said that so far in January the electric vehicle maker is seeing the strongest orders “ever in our history.”

Morningstar equity analyst Seth Goldstein called the results “solid” and reiterated his fair value estimate of $220 per share on the automaker. At the current $157.92, Goldstein considers Tesla’s stock to be undervalued.

For 2022, Tesla reported net income of 12.6 billion, or $3.62 per share, on revenue of $81.5 billion, compared with $5.5 billion, or $1.63 per share, on revenue of $53.8 billion in 2021.

Yet Tesla—which chief executive Elon Musk now bills as an artificial intelligence company—fell short of expectations in the fourth quarter despite the results showing substantial year-over-year gains. Revenue came in just under Wall Street estimates but jumped 33% from year-ago levels to $24.3 billion, close to the $24.7 billion expected, according to data provider FactSet. Net income of $3.7 billion fell short of the $4 billon expected but was up nearly 60%. Tesla posted earnings per share of $1.07, less than the $1.13 expected.

Musk Sees Recession in 2023

Musk cautioned the United States will “probably have a pretty difficult recession this year.” While a recession could affect demand, it would also lead to lower input costs and improve margins, he noted. Musk said Tesla is in a good position to withstand what could be a “severe” recession because it has little debt and $22 billion in cash on its balance sheet. In a conference call following the release of earnings, Musk returned repeatedly to his concerns about recession.

Tesla Key Q4 Earnings Takeaways

  • Revenue: $24.3 billion versus FactSet estimate of $24.7 billion
  • Net income: $3.7 billion versus FactSet estimate of $4 billion.
  • Earnings per share: $1.07 versus FactSet estimate of $1.13.
  • Auto gross margin 25.9% in fourth quarter and 28.5% for full year.
  • Puts 2023 production at 1.8 million cars, potentially 2 million

Musk forecast the company will produce 1.8 million cars, and potentially 2 million, this year based on demand. The company raised the price of its Y model as a result of the strong demand. Musk addressed concerns about the company’s strategy of cutting prices to spur demand in China by saying “price really matters” and noted that “it has always been our goal to make cars as affordable as possible.”

Tesla Stock Fair Value Estimate

Morningstar’s Goldstein noted, however, that his $220 fair value estimate on Tesla stock now reflects a lower average selling price and profitability, offset by higher volumes. He says higher raw materials costs in the fourth quarter resulted in a quarterly contraction in the automotive gross profit margin, excluding regulatory credits. Automotive gross margins fell to 25.9% in the quarter, compared with 27.9% in the third quarter and 30.6% in the year-earlier period.

“Given Tesla’s price declines announced in early January, and our view that lithium contract prices will rise in 2023—as spot prices average $70,000 per metric ton—we expect automotive gross profit margins to contract further in 2023, partially offset by lower nonlithium raw materials prices in the second half of the year as Tesla’s sourcing contracts reset,” Goldstein said. “Over the long term we expect Tesla to drive gross margin improvement from lower raw materials prices and the full ramp-up of its new plants, including rising production of its in-house 4680 battery cell manufacturing operation.”

Tesla Stock Key Stats:

  • Sector: Consumer Cyclical
  • Industry: Auto — Manufacturers
  • Fair Value Estimate: $220
  • Morningstar Rating: 4 Stars
  • Economic Moat Rating: Narrow
  • Moat Trend: Stable

Zachary Kirkhorn, Tesla’s chief financial officer, said the company was most focused on operating margins, noting that its energy business is growing faster than its vehicle business. Tesla’s operating margin fell to 16% in the quarter from 17.2% in the third quarter but rose from 14.7% a year earlier.

The company said it is “making progress” on improving cost controls at its Berlin and Austin plants and that “costs were dropping” commensurate with a rise in production.

Tesla Says Cybertruck on Its Way

Production of its long-awaited Cybertruck is set to begin this summer but the company emphasized that volume won’t ramp up until sometime next year.

On whether Tesla is facing brand risk from Musk’s ownership of social media platform Twitter, and his active and sometimes controversial social media account, Musk said his 127 million followers was proof of his popularity and that Twitter was “a powerful tool” to drive demand for Teslas. “The net value of Twitter is gigantic,” he said.