You’re here TSLA is expected to release its third-quarter earnings report on Wednesday, October 18, after the market closes. Here’s Morningstar’s take on what to look for in Tesla’s earnings and stock.
Morningstar Key Metrics for Tesla
What to Watch for in Tesla’s Third Quarter Results
We will look at three main areas:
Automotive profit margins: This is an important indicator of how Tesla’s strategy of reducing prices to stimulate demand is affecting profits. Our base case is that the company will likely experience lower margins in the second half compared to the first. Knowing the impact of price cuts will help us determine to what extent we will need to change our profit forecasts for the automotive segment.
Energy production and storage benefits: Tesla’s automotive segment remains its largest source of revenue and profit, but that segment is growing. EG&S became profitable last year and has delivered strong growth in 2023 thanks to a massive increase in energy storage (large battery) sales. We expect this segment to become an important secondary profit source as the stationary energy storage market continues to grow.
New products and services: We will seek management feedback on new products and services, namely the Cybertruck and fully autonomous driving software. The Cybertruck has been long anticipated and would be the fifth vehicle that Tesla could sell in the automotive market, giving the company a new vehicle with which to increase its volumes. Fully autonomous driving software is one of the largest sources of ancillary profits for Tesla, adding a potential new source of revenue and profit for each vehicle sold once the full version of the software can be rolled out. We will await updates from management to see if our progress prospects are on track.
Estimated fair value of Tesla
With its 3-star rating, we believe Tesla stock is slightly overvalued relative to our long-term fair value estimate.
Our fair value estimate is $215 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds non-recourse, non-dilutive convertible debt.
In the near term, we expect Tesla to increase its total annual vehicle delivery volume to around 1.8 million in 2023, or around 37% from 2022. However, due to price reductions far outweighing the cost savings , we expect the automotive sector’s gross margin to contract to 19%. in 2023 compared to 29% reached in 2022.
Longer term, we assume Tesla will deliver around 5 million vehicles per year in 2030. This includes fleet sales, a growing opportunity for the company. Our forecast is well below management’s ambitious goal of selling 20 million vehicles by the end of this decade. However, this is almost 4 times the 1.31 million vehicles delivered in 2022. Our forecast assumes Tesla increases its Model Y deliveries, then successfully launches its light trucks, sports cars, semi-trailers and, eventually, its affordable sedan and SUV platforms.
We believe Tesla will be successful in continuing to reduce its manufacturing costs per vehicle. Combined with a shift to producing a greater proportion of more expensive Model Y vehicles, we expect segment gross margins to reach approximately 31% from the 29% achieved in 2022, generating automotive profit growth in excess of income growth.
Economic moat assessment
We give Tesla a narrow moat, due to its intangible assets and cost advantage. The company’s strong brand cachet as a luxury automaker commands premium prices, while its expertise in electric vehicle manufacturing allows it to make its vehicles at lower prices than its competitors.
Tesla’s brand cachet likely won’t be altered anytime soon as other automakers move into the electric vehicle business. We expect the company to continue to innovate to stay ahead of startups and established competitors. By focusing first on the luxury automobile market, Tesla was able to create tremendous publicity that reached beyond its customers. This generated strong consumer demand for its later lower-priced vehicles, like the Model 3 and Model Y. As other new vehicles were released, like the Cybertruck or the platform that would produce the sedan and the Affordable SUVs (known as the $25,000 vehicle), we expect the company’s strong brand to continue to generate consumer demand.
We believe Tesla enjoys a cost advantage in electric vehicle production due to its manufacturing scale. The company’s total vehicle volume increased from just over 100,000 in 2017 to more than 1.3 million deliveries in 2022. During the same period, the average cost of goods sold per vehicle fell by more than 50%, from $84,000 to less than $39,000, and gross profit margins increased from 20% to 26%, excluding the sale of regulatory credits.
Even as traditional automakers begin producing more electric vehicles, we expect Tesla to continue to have lower costs as the company outlined a plan to further reduce battery cell costs by 56% over the next few years . With Tesla’s cost per vehicle falling, it could take years for incumbent automakers to catch up, if they ever do, because they won’t want to build many new factories from scratch, as Tesla is doing .
We believe Tesla’s moat will persist in the future and allow it to generate excess returns on capital. We see room for Tesla to exceed its cost of capital over at least the next 20 years, which is the metric we use for broad rating. However, the second ten-year period carries great uncertainty for both Tesla and the auto industry as a whole, given rapid advances in autonomous vehicle technologies, which could transform the way consumers use vehicles. Therefore, we consider a narrow rating, which assumes an excess return duration of 10 years, to be more appropriate.
Risk and uncertainty
We give Tesla a very high Morningstar Uncertainty Rating because we see a wide range of potential outcomes for the company.
The automotive market is very cyclical and subject to sharp declines in demand depending on economic conditions. As the market leader in electric vehicles, Tesla is vulnerable to growing competition from traditional automakers and new entrants. As new, cheaper electric vehicles begin to sell, Tesla may be forced to continue lowering prices, cutting into its industry-leading profits. With more electric vehicle choices, consumers may have a less favorable view of Tesla. The company is investing heavily in capacity expansions that carry risks of delays and cost overruns. The company also invests in research and development to try to maintain its technological advantage, with no guarantee that these investments will bear fruit. Tesla’s CEO owns just over 20% of the company’s stock and uses it as collateral for personal loans, increasing the risk of a large sale to pay off debt.
Tesla faces environmental, social and governance risks. As an automaker, it is prone to potential product defects that could lead to recalls, including its self-driving software. We see a moderate impact if this happens. Another risk concerns employee retention. If Tesla is unable to retain key employees, such as CEO Elon Musk, its favorable brand image could decline. If the company fails to retain production line employees, it could experience delays. We find low probability but moderate materiality for both risks.
TSLA bulls say
- Tesla has the potential to disrupt the automotive and power generation industries with its technology for electric vehicles, autonomous vehicles, batteries and solar power generation systems.
- Tesla will see its profit margins increase by reducing its unit production costs over the coming years.
- Through the combination of Tesla’s cutting-edge technology and its unique supercharger network, the company’s electric vehicles offer market-leading features, which should help Tesla maintain its market-leading status as the market expands. The adoption of electric vehicles is increasing.
TSLA Bears Say
- Traditional automakers and new entrants are investing heavily in the development of electric vehicles, which will cause Tesla’s sales growth to slow and be forced to reduce its prices due to increased competition, thereby eroding its profit margins.
- Tesla’s reliance on Chinese-made batteries for its low-cost Model 3 vehicles will hurt sales because those vehicles won’t be eligible for U.S. subsidies.
- Prices of solar panels and batteries could fall faster than Tesla can cut costs, resulting in little or no profit for the energy production and storage business.
This article was compiled by Adrian Teague.