Key Morningstar metrics for Tesla

  • Fair Value Estimate: $450
  • Morningstar Rating: ★★★★
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Very High

The Wall Street Journal reported that Tesla TSLA executives are considering multiple divestiture paths for Tesla’s China businesses.

Why it matters: The article said the divestitures are being considered in order to clear potential regulatory hurdles for a Tesla-SpaceX merger. Tesla has an auto and battery factory in China, while SpaceX is a US government defense contractor.

  • A Tesla-SpaceX merger could face intense scrutiny and potentially be blocked by both the US and Chinese governments. A divestiture of Tesla’s Chinese businesses could clear the way for regulatory approval from both governments, allowing the deal to move forward.
  • We see multiple divestiture paths. One is a spinoff in which Tesla retains a majority, noncontrolling stake in the business, with shares potentially listed on a Chinese exchange. Another is a sale with a franchise-type agreement with the buyer. A third is an asset sale, potentially to an automaker.

The bottom line: For now, we maintain our $450 fair value estimate for narrow-moat Tesla as neither a divestiture nor a merger with SpaceX has been announced.

  • At current prices, we view Tesla shares as undervalued, with the stock trading in 4-star territory and more than 30% below our fair value estimate. For long-term investors, we see strong profit growth from Tesla’s autonomous driving and humanoid robot businesses.
  • Based on market capitalizations, Tesla trades at nearly a 20% discount to SpaceX. Yet, Tesla has larger revenue, profits, and free cash flow. We contend that Tesla shareholders should receive at least 50% of the combined company, but up to 68%, based on our fair value estimates for Tesla and SpaceX.