Tesla: Stock of the Week

Key Takeaways for Tesla Stock:

• Tesla could be at a critical juncture as price cuts exceed cost improvements.
• Deliveries are up 37% in 2023 versus 2022, but we see gross margins down to 19% from 29%.
• Investors should expect a wide range of outcomes for Tesla stock as competition picks up.

Andrew Willis: We may be seeing more Teslas on the road these days, but we’re also seeing more electric vehicles from other brands – and they’re giving the company a run for their money.

Tesla (TSLA) cut prices and is leaning on a cost advantage in electric vehicles with its manufacturing scale. But at the moment, price cuts exceed cost improvements achieved since last year according to strategist Seth Goldstein. And this inflection point should serve as a reminder for Tesla investors to take stock of the company’s latest long-term price trajectories from here – because bulls and bears are extremely divided on outcomes right now.

Our latest downside scenario puts Tesla stock at $90 U.S. dollars, while the upside fair value estimate is $420 U.S. dollars per share. How did outlooks get so polarized?

Consider how valuations of Tesla stock today, versus just a few years ago, are now more complex and comprised of businesses ancillary to EV manufacturing, like insurance or software. Tesla’s autonomous ride-hailing business already makes up roughly 7% of our fair value for the company. And in terms of revenue, the company’s energy storage business already makes up around 6%, and we expect that to grow 33% annually...

Tesla Will Have to Spend US$100 Billion to Keep Growing

And then there’s Tesla’s core EV manufacturing business and the massive capital expenditures it now faces in order to improve margins and increase deliveries, which adds to the complexity. Over the next decade, we think Tesla will need to spend over 100 billion U.S. dollars to fund this growth… at least funds from the secondary businesses should help.

For Morningstar, I’m Andrew Willis.

 Tesla 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.

 Tesla 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 U.S. subsidies.
• Solar panel and battery prices will decline faster than Tesla can reduce costs, resulting in little to no profits for the energy generation and storage business.