Tesla (NAS:TSLA) is set to release its third-quarter earnings report on Oct. 23rd in the US. Here’s Morningstar’s take on what to look for in Tesla’s earnings report and the outlook for its stock.

Key Morningstar metrics for Tesla

  • Fair Value Estimate: $200.00
  • Morningstar Rating: 3 stars
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Very High

Earnings release date

Wednesday, Oct. 23, after the close of trading in the US

What to watch for in Tesla’s Q3 earnings

During the second-quarter earnings call, management maintained its timeline for a new more affordable vehicle to enter production next year. We will look for an update and any other product features. This vehicle will likely drive double-digit delivery growth in 2026 if production begins in 2025.

Tesla’s automotive gross profit margins stabilized at 18.5% during the first half of the year, down from 19.5% in 2023 and 28.5% in 2022. With deliveries returning to growth in the third quarter, lower prices, and likely lower raw materials input costs, we will look to see how these factors affect gross profit margins.

Tesla’s full self-driving software is key to the company’s long-term profit growth. We view it as a vital differentiator for consumers, and it would eventually enable the operation of the planned robotaxi fleet. We will look for FSD adoption, miles driven on FSD, and any other metrics management can share to track progress here.

Fair Value estimate for Tesla

With its 3-star rating, we believe Tesla’s stock is fairly valued compared with our long-term fair value estimate of $200 per share. We use a weighted average cost of capital of just under 9%. Our equity valuation adds back nonrecourse and non-dilutive convertible debt. We believe Tesla’s deliveries will be slightly higher in 2024 than the 1.81 million in 2023. We anticipate lower average selling prices, as the company will likely have to cut prices in key markets like China, in line with peers. We forecast automotive gross margins will be 19% in 2024, in line with 2023 results.

In the longer term, we assume Tesla will deliver nearly 5 million vehicles per year in 2030. This includes fleet sales, an expanding opportunity for the firm. Our forecast is well below management’s aspirational goal of selling 20 million vehicles by the end of this decade. However, it is nearly 3 times the 1.8 million vehicles delivered in 2023.

Economic Moat rating

We award Tesla a narrow moat based on its intangible assets and cost advantage. The company’s strong brand cachet as a luxury automaker commands premium pricing, while its EV manufacturing expertise lets it make its vehicles more cheaply than competitors.

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 they 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, letting it continue to charge premium prices for its EVs.

TSLA

Financial strength

Tesla is in excellent financial health. It has historically used credit lines, convertible debt financing, and equity offerings to raise capital to fund its growth plans. In 2020, the company raised $12.3 billion in three equity issuances. We think this makes sense, as funding massive growth solely through debt adds additional risk in a cyclical industry.

Risk and uncertainty

We assign Tesla a Very High Uncertainty Rating, as we see a wide range of potential outcomes for the company. The automotive market is highly cyclical and subject to sharp demand declines based on economic conditions. As the EV market leader, Tesla is vulnerable to growing competition from traditional automakers and new entrants. As new lower-priced EVs enter the market, the firm may be forced to continue to cut prices, reducing its industry-leading profits. With more EV choices, consumers may view Tesla less favorably.

The firm is investing heavily in capacity expansions that carry the risk of delays and cost overruns. The company is also investing in R&D to maintain its technological advantage and generate software-based revenue, with no guarantee these investments will bear fruit. Tesla’s CEO effectively owns a little more than 20% of its stock and uses it as collateral for personal loans, which raises the risk of a large sale to repay debt.

TSLA bulls say

  • Tesla could disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
  • Tesla will see higher profit margins as it reduces unit production costs over the next several years.
  • Tesla’s full self-driving software should generate growing profits in the coming years as the technology continues to improve, leading to increased adoption by Tesla drivers and licensing from other auto manufacturers.

TSLA bears say

  • Traditional automakers and new entrants are investing heavily in EV development, resulting in Tesla seeing a deceleration in sales growth and cutting prices due to increased competition, eroding profit margins.
  • Tesla’s reliance on batteries made in China for its lower-price Model 3 vehicles will hurt sales as these autos will not qualify for US subsidies.
  • Solar panel and battery prices will decline faster than Tesla can reduce costs, resulting in little to no profits for the energy generation and storage business.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.