We've raised our fair value estimate for narrow-moat Tesla (NAS: TSLA) to $200 per share from $195 following first-quarter earnings, due to an improved near-term outlook. Shares surged more than 12% after earnings as the market reacted positively to management's outlook. At current prices, we view Tesla as undervalued, with the stock trading in 4-star territory.

We had four key takeaways. First, the affordable vehicle is still on track for first deliveries by the end of 2025. Tesla's affordable vehicles are a catalyst for shares. Affordable vehicles should eventually generate a majority of its total deliveries. We continue to forecast that Tesla delivers around 5 million vehicles by 2030.

Second, the full self-driving subscription software, or FSD, is seeing stronger adoption. We estimate over 10% of the eligible fleet has adopted subscription software, which is above our prior forecast. As such, we've updated our assumptions for a higher adoption rate. In our view, FSD will be a driver of consumers choosing Tesla over other brands, which supports our outlook for deliveries growth over the rest of the decade.

Third, we raised our energy storage volume growth forecast. Energy storage volumes increased at just 4% year over year in the first quarter. However, as much of the business is of large-scale batteries built on longer-term projects, volumes can be volatile from quarter to quarter, as they are recognized upon the completion of project milestones. Management guided to at least 75% year-over-year volume growth, which we think is achievable, given that most of these volumes are likely already contracted.

Finally, we slightly raised our 2024 deliveries forecast, versus our prior forecast for no growth. Our improved outlook is due to Tesla's recent price cuts, so we also slightly reduced our near-term automotive gross margin forecast. We think Tesla could cut prices further as management aims to pass along the majority of cost savings to customers to drive demand.

Business strategy and outlook

Tesla is one of the largest battery electric vehicle automakers in the world. In less than a decade, the company went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. The company competes in the entry-level luxury car and midsize crossover sport utility vehicle markets with its Model 3 and Model Y vehicles. Tesla also sells a light truck—the Cybertruck, and a semi truck. The company plans to launch an affordable SUV and luxury sports car in the future.

Tesla aims to retain its market leader status as EVs grow from a niche market to reaching mass consumer adoption. We forecast EVs will reach 40% of global auto sales by 2030. To meet growing demand, Tesla opened two new factories in 2022, which increased its production capacity. Tesla also invests around 4% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs.

For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process, such as reducing the total number of parts that need to be assembled in a vehicle. The company also began designing its own batteries. Tesla's goal is to reduce costs by over 50%.

To reach functional parity, EVs will need to have adequate range, reduced charging times, and availability of charging infrastructure. Tesla’s extended-range EVs are already at range parity with ICE vehicles. The firm also continues to expand its supercharging network, which consists of fast chargers built along highways and in cities throughout the US, EU, and China. The range and supercharger network help eliminate road trip anxiety, or the functional barrier to mass market EV adoption.

Tesla is also attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving software.
It also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow accordingly.

Moat rating

Read more about how to identify companies with economic moats. 

We award Tesla a narrow moat rating. Tesla’s moat stems from two of our five moat sources: intangible assets and cost advantage. The company’s strong brand cachet as a luxury automaker commands premium pricing, while its EV manufacturing expertise allows the company to make its vehicles cheaper than its competitors.

Intangible assets

Tesla’s brand cachet is not likely to be impaired anytime soon as other automakers move into the battery electric vehicle space because we expect the company to keep innovating to stay ahead of startup and established competitors. The Model S Plaid, the most upgraded version of Tesla’s luxury sedan, offers 390 miles of range, which is at the high end for electric vehicles. It does 0-60 mph in under 2 seconds and has 1,020 horsepower, putting the Model S Plaid in a rare class of performance among all autos, regardless of powertrain.

By focusing on the luxury auto market first, Tesla was able to create tremendous media publicity for the company that reaches beyond its customers. This generated strong consumer demand for its subsequent vehicles at lower price points, such as the Model 3 and Model Y. As other new vehicles are launched, such as the Cybertruck or the platform that will produce the affordable SUV (known as the $25,000 vehicle), we expect the company’s strong brand will continue to generate consumer demand.

Tesla has a more high-tech vehicle with the ability to do drivetrain updates and other updates via Wi-Fi or a cellular connection, and customers do not have to visit a store for many service needs. Tesla will instead pick up the vehicle from home and often return it the same day, while providing a fully loaded loaner for no charge, or visit the customer's home or work and service the car there. This experience is much easier than many other automakers' service, which helps Tesla's brand equity. Further, this has been accomplished with little to no spending on advertising, which is rare for a consumer brand. This strong brand equity has carried over to Tesla’s energy generation and storage business, where the company can charge a premium for its fully integrated solar panel, inverter, and home battery storage systems sold to consumers.

Tesla’s proprietary technology contributes to its intangible asset-driven competitive advantage. This form of intangible assets applies to EVs due to their innovative, highly engineered nature and because patents for EV technologies hold somewhat less value due to the ability of competitors to create alternatively designed, but ultimately similar, products. Since launching the Model S in 2012, Tesla has been the industry leader in electric vehicles, producing the best EVs on the market.

The company invests nearly 6% of sales in R&D to maintain its best-in-class range, which is well ahead of the competition on a miles per kilowatt-hour basis and continues to improve other vehicle specs such as power. Tesla is also investing heavily in its proprietary autonomous vehicle technology and building one of the world’s largest supercomputers to train self-driving artificial intelligence. With R&D spending in line with its peers, we think Tesla will be able to maintain its proprietary technological advantage.

Tesla will face increasing competition in the coming years. Automakers plan to electrify their fleets by adding EV versions of existing vehicles and creating new platforms. However, we see EVs becoming a greater proportion of auto sales, growing to 30% by 2030, up from 3% in 2020, which will expand the market as EVs rapidly take share from internal combustion engine vehicles. As new models are introduced, Tesla’s technological advantage and the strength of its brand will remain intact, which will allow the company to continue to charge a premium price for its EVs.

Cost advantage

We think Tesla benefits from a cost advantage in electric vehicles production thanks to its manufacturing scale. Tesla’s total vehicle volume has grown from just over 100,000 in 2017 to over 1.8 million deliveries in 2023. During the same period, the company’s average cost of goods sold per vehicle has fallen over 55%, from $84,000 to just over $36,000. While some of this is due to manufacturing a greater proportion of midsize cars and SUVs versus luxury autos, the majority of the COGS decline has come from the company’s focus on reducing manufacturing costs due to scale.

Legacy automakers are gradually transitioning to BEV production from internal combustion engines, but we expect they will be saddled with legacy ICE costs for a long time. Even as legacy automakers begin to produce more EVs, we expect Tesla will continue to have lower costs as it has outlined a plan to further reduce battery cell costs by 56% over the next several years. With Tesla’s cost per vehicle set to fall, incumbent automakers may take years to catch up to Tesla, if ever, as they won’t want to build many new factories from scratch like Tesla is doing.

We think Tesla’s combination of intangible assets and cost advantage will persist in the future and allow the firm to generate excess returns on capital. We see the potential for Tesla to outearn its cost of capital over at least the next 20 years, which is the measurement we use for a wide moat rating. However, the second 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. As such, we view a narrow moat rating, which assumes a 10-year excess return duration, as more appropriate.