TESLA's fair value is $210 only, says Analyst.
$Tesla Motors(TSLA)$ is set to release its fourth-quarter earnings report on Wed, 24 2024, after the close of trading.
Here is $Morningstar(MORN)$ assessment of Tesla’s earnings and stock.
Tesla’s Q4 Earnings - what to watch ?
(1) Operating profit margins.
Tesla’s profit margins have fallen to Q3 2023’s low of < 8%, from Q3 2022’s high of 17%.
Need to examine how margins end up in Q4 2023, given lower prices that are partially offset by:
Lower raw material costs.
Record production and deliveries.
The growing profitability of (a) energy generation and (b) storage segments should additionally help companywide margins.
(2) 2024 Outlook.
Tesla management does not provide guidance in terms of traditional financial metrics such as (i) revenue or (ii) profits.
It does however offer 2023 deliveries guidance of at least 1.8 Million vehicles, that was met.
Now, it is to see what management is thinking about 2024, in terms of growth based on existing vehicle lineup.
(3) New affordable vehicle launch.
In the coming years (not 2024), Tesla’s next wave of growth will be driven by its new Model 2 platform, that is likely feature a smaller sedan and smaller SUV versus the Model 3 and Model Y.
These vehicles will compete in the affordable vehicle segments.
Morningstar’s view is the smaller (hence cheaper!) EVs will be the key to Tesla’s planned 5 Million deliveries by 2030.
This will be up from 2022’s of over 1.8 Million.
Now is awaiting Tesla’s update on when these vehicles will likely launch.
(4) Full self-driving capability.
In 2015, Mr Musk talked about achieving autonomous driving for Tesla EVs by 2018.
6 years on, it has been swept under the rug with nary an update on the state of Full Self Driving (FSD) by the snakeoil salesman himself.
Once ready for full launch, FSD could immediately generate strong incremental revenue and profits for the company.
Hell, it could even be a key feature on Tesla’s vehicles that differentiates them from competitors.
Until then, it’s been 6 years of waiting, waiting and more waiting, without significant results on the table.
Every investor will just have to stick your neck out and continue to wait for update on progress toward a full working version of the software.
Tesla - Fair Value Estimate.
With its 3-star rating, Morningstar believe Tesla’s stock is fairly valued compared with their long-term fair value estimate.
Morningstar has a fair value estimate of $210 per share, using a weighted average cost of capital of just under 9%. (see above)
*Note: Morningstar’s equity valuation adds back nonrecourse and non-dilutive convertible debt.
In the longer term, it is assumed that Tesla is able deliver around 5 Million EVs per year in 2030.
This includes fleet sales, an expanding opportunity for the EV maker, where Tesla management’s aspirational goal has been selling 20 Million EVs by end 2030.
Although Morningstar’s forecast has been more conservative and definitely more “realistic” than Tesla’s management dream-number of 20 Million, it is still nearly 4 times Tesla’s 2022 1.31 Million EVs delivered.
Assumptions for the 5 Million target:
Tesla increases its Model 3 and Model Y deliveries.
Cybertruck is “hugely” success” (which it is not).
Tesla ramps up volumes over several years, including the semi-trucks.
Predicts that Tesla will launch (a) sports car and eventually (b) affordable sedan and SUV platforms anytime from 2026 onwards.
Tesla continue to reduce its manufacturing costs on a per-vehicle basis.
Lastly, production shifts to higher-priced Model Y, allowing gross margin to increase by 30% (from current), near the 29% level achieved in 2022; over the medium to long term.
Economic Moat Rating
Tesla's strong brand and manufacturing prowess grant it a narrow competitive moat, allowing it to generate above-average returns on capital.
Their luxury image commands premium pricing, while their expertise in making electric vehicles keeps production costs lower than most competitors.
Will this edge endure? While expecting them to outperform their cost of capital for at least the next 10 years, the second decade brings significant uncertainty.
Rapid advancements in autonomous driving could reshape how consumers utilize vehicles, impacting the entire automotive industry.
This potential disruption makes a "narrow moat" rating, with a 10-year excess return horizon, more appropriate for Tesla's current position.
Risk and Uncertainty
Morningstar assigns Tesla a Very High Uncertainty Rating due to the vast range of potential outcomes facing the company.
Economic Cycles: The automotive market is highly cyclical and maybe subjected to falling demand due to economic conditions.
Competition Intensifies: Traditional automakers and new entrants are increasingly competing for the same piece of pie, potentially forcing Tesla to continue to slash prices to keep up demand but further impacting its profit margins.
Consumer Choice: With more EV options available, Tesla's brand appeal could weaken, affecting demand.
Expansion Risks: Heavy investments in capacity expansion introduce potential delays and cost overruns.
R&D Uncertainties: Investments in R&D to maintain technological advantage and generate software revenue carry no guarantee of success.
CEO Stock Holdings: The significant personal stake (over 13%) held by Tesla's CEO and its use as loan collateral raise concerns about potential large-scale selloffs to repay debt.
TSLA Bulls Say
Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
Tesla will see higher profit margins as it reduces unit production costs over the next several years.
Through the combination of Tesla’s industry-leading technology and its unique supercharger network, the company’s EVs offer the best function of any on the market, which should help Tesla maintain its market-leader status as EV adoption increases.
TSLA 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 reliance on batteries made in China for its lower-price Model 3 vehicles will hurt sales, as these autos will not qualify for US subsidies.
Solar panel and battery prices could decline faster than Tesla can reduce costs, resulting in little to no profits for the energy generation and storage business.
My viewpoints: (mine & mine only)
I think Morningstar has done an incredible job of keeping their assessments of Tesla clear and concise, however I think some of the information seems outdated.
Below are my refute to some of the points mentioned.
(1) It is difficult to qualify that Cybertruck launch is successful when Tesla has not gone into full production mode. Production is not expected to be in optimum capacity, not until 2025.
(2) Fleet sales is considered a “failure”. Only need to look to $Hertz Global Holdings, Inc.(HTZ)$ Hertz’s latest move to dispose of its entire fleet of Tesla EVs (for as low as $14,000 per EV) due to (a) very expensive maintenance costs and (b) falling customer’s demand. (see above)
(3) Tesla’s Full Self-Driving (FSD) has stagnant at Level 2 certification for the longest time. There is practically no progress. Otherwise, you would have heard mr musk bragging about it.
It is not the leader in autonomous driving in the US and China.
In the US, it is $Alphabet(GOOG)$ spinoff company - Waymo. It is certified with Level 4 autonomous driving capability — 2 levels higher than Tesla and 2 more level to go before achieving Full autonomous driving.
In China, it is $BYD Co., Ltd.(BYDDY)$ with its provisional Level 3 autonomous driving capability so that BYD’s EV could carry out its trial on high-speed roads.
Although lower than Waymo’s Level 4, it is still 1 level up, compared to Tesla.
(4) Morningstar’s assumptions for Tesla 5 Million EV sales are too presumptuous. It is more like a wish list without any concrete facts to back up these “wants”.
(5) There was no mention that Tesla is facing increasing headwinds for its made-in-China EVs as a result of missing out on EVs’ tax incentives due to revisions to qualification rules & regulations.
This happens in the France, Germany and US (see below)
With Tesla’s Q4 2023 earnings out on Wed, 24 Jan 2023 evening — is it better to sit out the next 3 days; just in case the earnings are disappointing and one could get a “better” deal subsequently?
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Do you think Tesla will report a “better” Q4 2023 earnings? I really doubt so !
Do you think Tesla’s EV pie will be nibbled by its competitors gradually overtime?
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