To The Moon

EV maker  $Tesla Motors(TSLA)$ has just delivered its Q4 2024 earnings’ results on 29 Jan 2025.

Although I have my personal view, it is always “good” to find out what the expert thinks.

I could learn something new from the veterans who have been around the block.

Below is Morningstar’s (M’s) take on Tesla’s results and its outlook for the stock.

M’s Key Metrics for Tesla

• Fair Value Estimate: $250.00

• Morningstar Rating: ★★

• Economic Moat: Narrow

• Morningstar Uncertainty Rating: Very High

About Tesla’s Q4 Earnings

Tesla shares were up +4% in after-hours trading as management reported progress in its autonomous driving software and maintained the timeline for launching more affordable vehicles later this year.

Why it matters:

Tesla aims to transform the firm from primarily producing autos to becoming a real-world artificial intelligence provider.

It also aims to develop fully autonomous driving software that will enable a robotaxi service.

• Tesla is a high-growth stock, having become the first profitable electric vehicle producer globally. With management’s goal of a robotaxi service, shares tend to be volatile and move based on management’s progress toward the successful development of autonomous driving software.

• With the first robotaxi launch planned in June 2025, Tesla is making meaningful progress toward its long-term autonomous driving goals.

Bottom line:

Morningstar has raised its fair value estimate to $250 per share from $210.

The increase is due to their assumptions for higher autonomous driving software adoption and faster growth in the energy generation and storage business.

• At current price ($361 as of 07 Feb 2025 closing), they view Tesla shares as overvalued with the stock trading around +70% above their updated fair value estimate.

• Morningstar recommends investors wait for a pullback in shares before considering an entry point.

Big picture:

Credit is due to the progress management has made on improving its autonomous driving software.

However, autos remain the firm’s core business and it must be on record that “automotive gross profit margins excluding credits fell sequentially to the midteens, from 20% in Q3 2024”.

• Morningstar thinks Tesla has no choice but to keep reducing prices in key markets such as China where it faces increased competition.

• As a result, this will keep margins below management’s 20% goal over the next few years.

• While there is evidence of a return to delivery growth in 2025, it is anticipated that it will largely come from the new more affordable vehicle version using the Model Y platform.

• As production of this vehicle ramps up, we expect it will weigh on profits in 2025.

Tesla stock price - January 2024 to January 2025

M’s Fair Value Estimate for Tesla.

With its 2-star rating, Morningstar believes Tesla’s stock is significantly overvalued compared with their long-term fair value estimate of $250 per share.

Using a weighted average cost of capital of just under 9%, Morningstar equity valuation adds back non-recourse & non-dilutive convertible debt. (see below)

In 2024, Tesla’s deliveries came in at 1.79 million EVs, slightly below the 1.81 million achieved in 2023.

In 2025, Morningstar forecast deliveries will return to growth as the affordable vehicle is launched by mid-2025.

At the same time, forecasted deliveries will come in below management’s long-term goal of 20%.

Economic Moat Rating

Tesla was awarded a narrow moat based on its intangible assets and cost advantage.

Tesla’s strong brand cachet as a luxury automaker commands premium pricing, while its EV manufacturing expertise lets it make its vehicles more cheaply than competitors.

Morningstar sees the potential for Tesla to out earn its cost of capital over at least the next 20 years, which is the measurement they use for a wide moat rating.

However, the 2nd 10-year period carries significant uncertainty for both Tesla and the broader automotive industry, given the rapid advancement of autonomous vehicle technologies, that could transform how consumers use vehicles.

Therefore, the narrow moat rating, that assumes a 10-year (maximum) excess return duration, as more appropriate.

Financial Strength

Tesla is in excellent financial health.

Cash, cash equivalents, and investments were over $33.6 billion and far exceeded total debt as of 30 Sep 2024.

Total debt was around $7.4 billion, while total debt excluding vehicle and energy product financing (non-recourse debt) was a little over $10 million.

To fund its growth plans, Tesla has historically used the following instruments to raise capital:

1. Credit lines.

2. Convertible debt financing.

3. Equity offerings.

In 2020, the company raised $12.3 billion in 3 equity issuances.

The equity issuances makes sense, as funding massive growth solely through debt adds additional risk in a cyclical industry.

Risk and Uncertainty

Tesla was assigned a “Very High” Uncertainty rating, as Morningstar foresees a wide range of potential outcomes for the company.

The automotive market is highly cyclical and subject to sharp demand declines based on economic conditions.

• As the EV market leader, Tesla is vulnerable to growing competition from traditional automakers and new entrants.

• As new lower-priced EVs enter the market, Tesla may be forced to continue to cut prices, reducing its industry-leading profits.

• With more EV choices, consumers may view Tesla less favorably.

The firm’s heavy investment in:

• Capacity expansions that carry the risk of delays and cost overruns.

• Research & development (R&D) to (i) maintain its technological advantage and (ii) generate software-based revenue, with no guarantee these investments will bear fruit.

Tesla’s CEO effectively owns a little more than 20% of its stock and uses it as collateral for personal loans, raising the risk of a large sale to repay debt.

Bulls Fans Say

• Tesla could disrupt the (a) automotive and (b) 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 few years.

• Tesla’s full self-driving software (FSD) should generate growing profits in the coming years as the technology continues to improve, leading to increased adoption by Tesla drivers and licensing from other car manufacturers.

Bear Fans Say.

• Traditional automakers and new entrants are investing heavily in EV development.

• In the long run, it should 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 could be value-destructive as the robotaxi product will face delays and competition from Waymo, that already offers a robotaxi service.

• Tesla’s energy generation and storage business will see increased competition from battery producers that are willing to take lower profits to win market share.

My viewpoint : (mine only)

Tesla’s stock price might have been dragged through the mud lately, due to its CEO over-enthusiatic execution of his assigned-task at DOGE, without due regards and due processes that I believed are rubbing a lot of people in the wrong way.

There’s just too many bad press(es) making their rounds in the internet. (see above)

Also, the rise of #1 Chinese EV maker $BYD Co., Ltd.(BYDDF)$ is proving to be too strong a contender for Tesla, with its CEO so, so distracted. (see above)

BYD’s next threat to Tesla will be its autonomous and AI prowess as the Chinese company draws closer and closer to beating Tesla in pure EV sales.

Latest news on BYD collaboration with AI-darling DeepSeek will definitely be a stab in Tesla’s back. (see above)

The fact that BYD can offer autonomous software in all its EVs, which are cheaper than Tesla’s, could push BYD over the top in the all-important China market.

Let’s not forget, autonomous driving is not making progress in China (for Tesla).

Remember Mr Musk’s confession during its latest quarterly earnings conference:

• Said Musk during Tesla’s Q1 earnings call when asked about the FSD rollout in China, "We do have some challenges because ... they currently don’t allow us to transfer training video outside of China.

• And then the US government won’t let us do training in China.

• So, we’re in a bit of a bind there. It’s like a quandary.”

Having read everything Morningstar has to say and what I have just shared, are you convinced that Tesla is “overvalued” for the future?

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