Keeping Tesla's $220 FVE as Higher Near-Term Deliveries Offset by Lower Profits; Shares Undervalued

We retain our $220 per share fair value estimate following Tesla's fourth-quarter results.

Seth Goldstein, CFA 26 January, 2023 | 8:26AM
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Tesla car

Tesla shares were up over 5% in after-hours trading, as we think the market reacted favorably to management guidance for at least 1.8 million deliveries in 2022, or around 40% growth. At current prices, we view Tesla shares as undervalued, with the stock trading in 4-star territory.

We updated our forecast for higher deliveries in 2023 to 1.8 million, from our prior forecast for 1.6 million. In light of Tesla's price cuts earlier this month, the company should see strong demand growth even amid an economic slowdown, particularly from the U.S., as Tesla's Model 3 and Model Y vehicles will generally be eligible for the Inflation Reduction Act tax credit.

However, we also updated our model to reflect a lower average selling price and profitability. Raw materials inflation drove a 250-basis-point contraction in automotive gross profit margins (excluding the sale of regulatory credits) versus the third quarter despite a slightly higher average selling price. Given Tesla's price declines announced in early January, and our view that lithium contract prices will rise in 2023—as spot prices average US$70,000 per metric ton—we expect automotive gross profit margins to contract further in 2023, partially offset by lower nonlithium raw materials prices in the second half of the year as Tesla's sourcing contracts reset. Over the long term we expect Tesla to drive gross margin improvement from lower raw materials prices and the full ramp-up of its new plants, including rising production of its in-house 4680 battery cell manufacturing operation. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Tesla Inc215.99 USD-12.33Rating

About Author

Seth Goldstein, CFA

Seth Goldstein, CFA  Seth Goldstein, CFA, is an equity analyst for Morningstar

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