Tesla (TSLA) reported fourth-quarter and full-year 2022 deliveries of 405,278 and 1,313,851, respectively. The 2022 deliveries represent 40% year-over-year growth, which was below our previous forecast. Having updated our model for lower near-term volumes, we reduced our Tesla fair value estimate to US$220 per share from US$250. Our narrow moat rating is unchanged.

Shares were down 14% at the time of writing as deliveries came in below Reuters consensus estimates of around 430,000. We think the market is also reacting to Tesla having produced over 34,000 vehicles more than it delivered in the fourth quarter, leading to concerns that the company is seeing slowing demand for its vehicles. However, fourth-quarter deliveries still grew 31% year over year, which we view as a sign that demand is still present and the company can still grow. Accordingly, we forecast over 1.6 million vehicles delivered in 2023, a 24% growth rate.

At current prices, we view shares as materially undervalued, with the stock trading in 5-star territory at a little less than 50% of our fair value estimate. Our long-term assumptions remain intact. We forecast over 5 million vehicles by 2031 as Tesla launches the Cybertruck and a new affordable vehicle platform. We also assume cost reductions lead to margin expansion.

Given the wide range of outcomes for Tesla, we modeled a downside scenario with a fair value estimate of US$90 per share. This scenario assumes long-term deliveries of just 2 million vehicles per year as increased competition limits future growth and forces Tesla to cut prices. We also assume cost reductions do not materialize, leading to profit margin contraction. We also assume no value for the autonomous driving software business, little growth for the insurance business, and no value for Tesla’s ancillary businesses. With shares trading just 15% above our downside scenario valuation, we see strong upside to shares with much of the bad news already priced in.