Tesla deliveries expected to slow
What we think of Tesla shares after the latest earnings report.
Key Morningstar metrics for Tesla
- Fair Value Estimate: $200.00
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Very High
What we thought of Tesla’s earnings
Our key takeaway from the Tesla TSLA earnings call was the firm’s strategic shift to the development and ramp-up of the new affordable sport utility vehicle, while focusing on cost cuts for its existing vehicles. This marks a change from the 2023 strategy, which was to cut prices to generate strong volume growth. We updated our forecast for lower near-term deliveries growth and lower near-term automotive gross profit margins. As a result, we reduce our fair value estimate on Tesla stock to $200 per share from $210. We maintain our narrow moat rating.
Tesla shares were down 6% in aftermarket trading. We think the market reacted negatively to management’s outlook that Tesla will enter a period of lower growth in 2024. At current prices, we view shares as fairly valued, with Tesla stock trading a little below our updated fair value estimate but in 3-star territory. Accordingly, we recommend investors wait for the stock to offer a solid margin of safety before considering an entry point.
Tesla deliveries expected to slow
This strategic shift will create different near- and long-term dynamics for the company’s deliveries growth. In the near term, we expect deliveries to grow at just 10% and 6% in 2024 and 2025, respectively. This is far below the 50%-plus annual growth that Tesla has generated over the past decade. However, as the company launches its affordable vehicle by the end of 2025, we expect Tesla will resume double-digit deliveries growth in 2026. As the affordable vehicle surpasses the Model 3/Y platform in deliveries, we forecast Tesla will deliver a little over 5 million vehicles by 2030.
We expect different near- and long-term profit margins as well. While Tesla is developing its affordable vehicle and ramping up Cybertruck production, we expect the company will see a period of lower automotive gross margins, in line with the 19% generated in 2023. Over the long term, we continue to forecast margin expansion as Tesla begins to sell its affordable vehicles and benefits from its cost-reduction initiatives.
Tesla is one of the largest battery electric vehicle automakers in the world. In less than a decade, the company went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. The company competes in the entry-level luxury car and midsize crossover sport utility vehicle markets with its Model 3 and Model Y vehicles. Tesla also sells a light truck—the Cybertruck, and a semi truck. The company plans to launch an affordable SUV and sports car in the coming years.
Tesla aims to retain its market leader status as EVs grow from a niche market to reaching mass consumer adoption. We forecast EVs will reach 40% of global auto sales by 2030. To meet growing demand, Tesla opened two new factories in 2022, which increased its production capacity. Tesla also invests around 4% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process, such as reducing the total number of parts that need to be assembled in a vehicle. The company also began designing its own batteries. Tesla's goal is to reduce costs by over 50%.
To reach functional parity, EVs will need to have adequate range, reduced charging times, and availability of charging infrastructure. Tesla’s extended-range EVs are already at range parity with ICE vehicles. The firm also continues to expand its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The range and supercharger network help eliminate road trip anxiety, or the functional barrier to mass market EV adoption.
Tesla is also attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving software.
It also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow accordingly.
Tesla's moat rating
Read more about how identifying a company with a moat impacts investment results.
We award Tesla a narrow moat rating. Tesla’s moat stems from two of our five moat sources: intangible assets and cost advantage. The company’s strong brand cachet as a luxury automaker commands premium pricing, while its EV manufacturing expertise allows the company to make its vehicles cheaper than its competitors.
Tesla’s brand cachet is not likely to be impaired anytime soon as other automakers move into the battery electric vehicle space because we expect the company to keep innovating to stay ahead of startup and established competitors. The Model S Plaid, the most upgraded version of Tesla’s luxury sedan, offers 390 miles of range, which is at the high end for electric vehicles. It does 0-60 mph in under 2 seconds and has 1,020 horsepower, putting the Model S Plaid in a rare class of performance among all autos, regardless of powertrain. By focusing on the luxury auto market first, Tesla was able to create tremendous media publicity for the company that reaches beyond its customers. This generated strong consumer demand for its subsequent vehicles at lower price points, such as the Model 3 and Model Y. As other new vehicles are launched, such as the Cybertruck or the platform that will produce the affordable sedan and SUV (known as the $25,000 vehicle), we expect the company’s strong brand will continue to generate consumer demand.
Tesla has a more high-tech vehicle with the ability to do drivetrain updates and other updates via Wi-Fi or a cellular connection, and customers do not have to visit a store for many service needs. Tesla will instead pick up the vehicle from home and often return it the same day, while providing a fully loaded loaner for no charge, or visit the customer's home or work and service the car there. This experience is much easier than many other automakers' service, which helps Tesla's brand equity. Further, this has been accomplished with little to no spending on advertising, which is rare for a consumer brand. This strong brand equity has carried over to Tesla’s energy generation and storage business, where the company can charge a premium for its fully integrated solar panel, inverter, and home battery storage systems sold to consumers.
Tesla’s proprietary technology contributes to its intangible asset-driven competitive advantage. This form of intangible assets applies to EVs due to their innovative, highly engineered nature and because patents for EV technologies hold somewhat less value due to the ability of competitors to create alternatively designed, but ultimately similar, products. Since launching the Model S in 2012, Tesla has been the industry leader in electric vehicles, producing the best EVs on the market. The company invests nearly 6% of sales in R&D to maintain its best-in-class range, which is well ahead of the competition on a miles per kilowatt-hour basis and continues to improve other vehicle specs such as power. Tesla is also investing heavily in its proprietary autonomous vehicle technology and building one of the world’s largest supercomputers to train self-driving artificial intelligence. With R&D spending in line with its peers, we think Tesla will be able to maintain its proprietary technological advantage.
Tesla will face increasing competition in the coming years. Automakers plan to electrify their fleets by adding EV versions of existing vehicles and creating new platforms. However, we see EVs becoming a greater proportion of auto sales, growing to 30% by 2030, up from 3% in 2020, which will expand the market as EVs rapidly take share from internal combustion engine vehicles. As new models are introduced, Tesla’s technological advantage and the strength of its brand will remain intact, which will allow the company to continue to charge a premium price for its EVs.
We think Tesla benefits from a cost advantage in electric vehicles production thanks to its manufacturing scale. Tesla’s total vehicle volume has grown from just over 100,000 in 2017 to over 1.3 million deliveries in 2022. During the same period, the company’s average cost of goods sold per vehicle has fallen over 50%, from $84,000 to under $39,000, and gross profit margins have expanded from 20% to 26% excluding the sale of regulatory credits. While some of this is due to manufacturing a greater proportion of midsize cars and SUVs versus luxury autos, the majority of the COGS decline has come from the company’s focus on reducing manufacturing costs due to scale. Legacy automakers are gradually transitioning to BEV production from internal combustion engines, but we expect they will be saddled with legacy ICE costs for a long time. Even as legacy automakers begin to produce more EVs, we expect Tesla will continue to have lower costs as it has outlined a plan to further reduce battery cell costs by 56% over the next several years. With Tesla’s cost per vehicle set to fall, incumbent automakers may take years to catch up to Tesla, if ever, as they won’t want to build many new factories from scratch like Tesla is doing.
We think Tesla’s combination of intangible assets and cost advantage will persist in the future and allow the firm to generate excess returns on capital. We see the potential for Tesla to outearn its cost of capital over at least the next 20 years, which is the measurement we use for a wide moat rating. However, the second 10-year period carries significant uncertainty for both Tesla and the broader automotive industry, given the rapid advancement of autonomous vehicle technologies that could transform how consumers use vehicles. As such, we view a narrow moat rating, which assumes a 10-year excess return duration, as more appropriate.