We reduce our Tesla (TSLA) fair value estimate to $215 per share from $225 to reflect higher near-term margin compression as the company is pursuing a volume-over-unit profit strategy in the near term by cutting prices to spur demand.

We reduced our near-term automotive profit margin forecast. Separately, we increased our outlook for the energy generation and storage segment to reflect higher growth as Tesla plans to build a new facility in China.

Our narrow moat rating is unchanged as Tesla should still generate excess returns on invested capital even in a lower-price environment.

The market reacted negatively to the company’s first-quarter results immediately after they were released. Tesla reported automotive gross margins fell 480 basis points sequentially from 25.9% in the fourth quarter of 2022 to 21.1% this quarter. The market may have reacted to management’s cautious commentary that suggests lower margins are likely to remain, at least through 2023.

Tesla Stock Undervalued


At current prices, we view Tesla shares as undervalued, with the stock trading more than 20% below our updated fair value estimate.

While we reduced our near-term outlook, our long-term view is unchanged. We think Tesla’s plan to reduce costs will drive long-term profit margin expansion. We continue to forecast roughly 5 million deliveries in 2030 with automotive gross profit margins recovering from the low-20% range this year to 29%, which is in line with the margins generated over the past two years.

Part of our view that Tesla will see long-term margin expansion comes from the company’s operating leverage as revenue should grow faster than overhead expenses. This held true during the first quarter. Revenue grew 24% versus the prior-year quarter while selling, general, and administrative, and research and development expenses were roughly flat. Over the long term, we expect overhead expenses will decline as a percentage of revenue driving operating margin expansion.

Tesla Stock at a Glance

  • Current Morningstar Fair Value Estimate: $215
  • Stock Star Rating: 3 Stars
  • Uncertainty Rating: Very High
  • Economic Moat Rating: Narrow