Key Morningstar metrics for Tesla

  • Fair value estimates: $475
  • Price/Fair Value Ratio: 0.81
  • Morningstar Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Very High

What we thought of Tesla’s earnings

Tesla TSLA reported solid third-quarter results with positive free cash flow, while long-term growth plans remain intact.

Why it matters: The stock fell over 2% in after-hours trading as the market reacted to capacity constraints in the company’s auto and battery growth, which could slow near-term growth. We expect Tesla to expand production capacity at all its factories, which should enable delivery growth over the coming years.

  • Management also said customers paid for full self-driving software in 75% of North American deliveries during the quarter. This supports our view that Tesla’s FSD autonomous driving software will differentiate it and drive delivery growth.
  • Tesla generated positive free cash flow during the quarter, despite higher capital expenditures. Tesla is building new factories, expanding capacity at its current factories, and building compute power to be able to run its autonomous driving and humanoid robot artificial intelligence software.

The bottom line: We raise our fair value estimate for narrow-moat Tesla to $475 from $450. Our increased valuation comes from higher full self-driving adoption assumptions and a lower near- and medium-term capital expenditures forecast.

  • At current prices, we view Tesla shares as undervalued, trading more than 20% below our updated fair value estimate, which puts shares in 4-star territory. We point to Robotaxi expansion and progress on Optimus as near-term catalysts for shares.
  • Management said it began production on Optimus and aims to begin selling its humanoid robots by the end of next year. We think this timeline may be optimistic, but we expect Optimus robots to be sold, initially to commercial customers, by the end of the decade, driving long-term profit growth.