The highlights of Tesla’s (ASX: TSLA) fourth-quarter earnings report were management’s plans to expand its autonomous driving ride-hailing to more US cities and begin mass-producing its humanoid robots by the end of 2026. Tesla shares were up in after-hours trading as the market reacted favorably to the news.

Why it matters: Tesla has been testing its robotaxi autonomous driving ride-hailing service in Austin, Texas, and the Bay Area of California. Tesla plans to expand to seven more US cities in the first half of 2026 and started removing its employees from its robotaxis in Austin.

  • This shows the autonomous driving software is progressing well through testing. Improving software should also support Tesla’s auto sales and its autonomous driving subscription software for Tesla owners.
  • The plan to begin mass manufacturing the Optimus humanoid robot this year surprised us, as we thought the project was still several years away. To do this, Tesla will stop selling its Model S and X vehicles and retool the factory that produces them to enable robot production.

The bottom line: We raise our fair value estimate for narrow-moat Tesla to $400 from $300. The primary drivers are a higher robotaxi valuation, increased adoption of Tesla’s autonomous driving subscription software at a higher price, and a higher valuation of the humanoid robot business.

  • At current prices, we view Tesla shares as fairly valued, trading around 10% above our fair value estimate, placing it in 3-star territory.
  • The bulk of our valuation comes from the long-term free cash flow generation of Tesla’s subscription software from its autos, robotaxis, and humanoid robots. While Tesla continues to test its software, we expect the stock to remain volatile as it progresses with these new products.

Tesla should see long-term profit growth from AI, Robotaxis, and Humanoid robots

Tesla is one of the largest battery electric vehicle automakers in the world. In less than a decade, the firm went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. Tesla competes in the entry-level luxury car and midsize crossover sport utility vehicle markets with its Model 3 and Model Y vehicles. It also sells a light truck—the Cybertruck—and a semi truck. Tesla plans to launch a robotaxi and a luxury sports car in the future.

Tesla aims to transition from primarily being an automaker to focusing on real world artificial intelligence. This includes self-driving software for use in its own vehicles and a ride-hailing service named robotaxi. The company is also working on developing humanoid robots for commercial and eventually consumer use.

To build its products, Tesla often goes upstream and controls much of its supply process. This includes lithium refining, battery design and manufacturing, and semiconductor design.

Tesla is attempting to take a larger share of its customers’ auto-related spending, which includes selling autonomous driving software on a subscription basis, insurance in a growing number of US states, and charging, where the company owns and operates over 8,000 fast charging stations globally.

For robotaxi, we expect autonomous vehicles, namely Tesla’s robotaxi and Alphabet’s Waymo, to make up 50% of ride-hailing rides in the US and Canada by 2030, as robotaxis are cheaper than human drivers. Tesla is currently in the testing phase of its robotaxi service and currently tests in Austin, Texas, and the Bay Area of California, with plans to expand to at least seven more cities in 2026. The company is moving through testing and plans to remove safety drivers in its robotaxis in the Austin area in the near future. Over time, we think Tesla will grow to become one of the largest ride-hailing providers in North America.

Tesla also sells solar panels and batteries to consumers and utilities. As the battery-based energy storage market expands, Tesla is well-positioned to grow accordingly.

Bulls say

  • Tesla has the potential to disrupt multiple industries with its technology for EVs, AVs, batteries, and humanoid robots.
  • Tesla’s full self-driving software should generate growing profits in the coming years as the technology continues to improve, leading to a robotaxi service, increased adoption by Tesla drivers.
  • Tesla’s humanoid robot will create shareholder value as its ability to perform multiple functions will transform manufacturing and be useful to consumers.

Bears say

  • Traditional automakers and new entrants are investing heavily in EV development, which will result in Tesla seeing a deceleration in sales growth and being forced to cut prices due to increased competition, eroding profit margins.
  • Tesla’s large investment into autonomous driving software will be value destructive as the robotaxi product will face delays and competition from Waymo, who already offers a robotaxi service.
  • Tesla CEO Elon Musk’s political activities will turn consumers away from buying a Tesla in key markets including the US and Europe, leading to lower sales and profits.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.