Tesla Gets a Moat Upgrade

We think the electric vehicle company has an improving sustainable competitive advantage

David Whiston, CFA, CPA, CFE 20 October, 2020 | 9:34AM

We are upgrading Tesla (TSLA)’s moat rating to narrow from none. Holding all else constant in our model, the moat change increases our fair value estimate by 26% to US $246. We are placing Tesla’s fair value estimate under review as additional valuation input changes may be necessary after analyzing Tesla’s third quarter results. Tesla reports earnings on Oct. 21 after the U.S. market closes and we will publish a note that night with a new fair value estimate. The firm may have a good quarter given it reported third quarter deliveries on Oct. 2 that showed a 43% year-over-year increase in total vehicle deliveries thanks to a 56% rise in combined Model 3 and Model Y sales.

The moat comes from two of our five moat sources, intangible assets and cost advantage. Tesla’s brand cachet is not likely to be impaired any time soon as other automakers move into the battery electric vehicle space, because we expect Tesla to keep innovating to stay ahead of startup and established competitors. The Model S now offers over 400 miles of range and next year’s plaid mode performance upgrade will enable the sedan to do 0-60 mph in under two seconds and have over 520 miles of range. The ability to possibly reduce battery cell costs by 56%, as outlined at the firms’ Sept. 22 Battery Day event, suggests a cost advantage that incumbent automakers could take years to catch or may never catch. Legacy automakers are gradually transitioning to battery electric vehicle, or BEV, production from internal combustion, but we expect they will be saddled with legacy ICE and people costs for a long time. Our projected Tesla return on invested capital assumptions are well above our weighted average cost of capital even in our bear case scenario. The moat upgrade assumes Tesla continues to grow and we see low risk of material value destruction and more reasons to upgrade the moat now than keep waiting for further improvement to award one.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Tesla Inc599.04 USD0.95

About Author

David Whiston, CFA, CPA, CFE

David Whiston, CFA, CPA, CFE  David Whiston, CFA, CPA, CFE, is an industrials strategist for Morningstar.

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