Tesla (NAS: TSLA) shares dropped 5% as deliveries came in below guidance and fell year on year in 2024. We think the company is still on track to see deliveries growth in 2025.

First ever annual decline in deliveries

We view the deliveries number as negative for Tesla. However, we're maintaining our USD 210 fair value estimate and Narrow Moat rating.

Lower deliveries reduces Tesla's growth and lowers the total addressable market for the company's ancillary services, including autonomous driving software, charging, and insurance. The slight decline highlights that the current vehicle lineup is nearing market saturation.

Looking forward, we're reducing our near-term deliveries outlook in the automotive segment. Separately, following record energy storage deployments, we're raising our energy storage growth forecast. The two changes roughly offset each other, leading to no change to our Fair Value estimate.

We view shares as overvalued. With the stock trading more than 80% above our Fair Value estimate it is in 1-star territory.

What next for Tesla?

In 2025, management hopes to grow deliveries through a new lower-priced vehicle that is set to enter production by midyear. Tesla also plans to launch its level 3 autonomous driving software in California and Texas, a key step toward the company's goal of a Robotaxi service.

Management guided to deliveries growth of 20% to 30% in 2025, but we see growth well below this range as we expect production of the new vehicle will take longer to ramp up versus the implied current timeline.

We expect the level 3 software will launch in 2025 but will likely require further improvements before Robotaxis can be feasible. We forecast the Robotaxi launch will be delayed past management's 2026 timeline.

Narrow Moat intact

We think that Tesla has a sustainable competitive advantage thanks to intangible assets and cost advantages. Tesla has garnered significant proprietary technology from being the best-in-class producer of EVs for over a decade.

We expect the company to maintain its brand cachet by continuing to innovating and stay ahead of startup and established competitors. This is helped by the 6% of annual revenues it continues to invest back into research and development each year.

We think Tesla benefits from a cost advantage in EV production thanks to total vehicle volume has grown from just over 100,000 in 2017 to nearly 1.8 million deliveries in 2024. During the same period, the company’s average cost of goods sold per vehicle has fallen over 55%, from USD 84,000 to just over USD 35,000.

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.

Unlike many of its competitors in the EV market, Tesla does not have to maintain legacy internal combustion engine production operations. We expect that incumbent automakers saddled with these costs may take years to catch up with Tesla’s lower EV production cost, if ever, as they won’t want to build many new factories from scratch like Tesla is doing.

Our long-term estimates trail management’s goals

Longer term, we assume Tesla delivers nearly 5 million vehicles per year in 2030. This includes fleet sales, an expanding opportunity for Tesla. Our forecast is well below management’s 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.

We also see the potential for a wide range of outcomes for the stock, resulting in an Uncertainty rating of Very High.

Tesla is not immune from the automotive market’s highly cyclical nature and it Tesla is subject to growing competition in EVs from traditional automakers and new entrants. As new lower-priced EVs enter the market, Tesla may be forced to cut prices further, reducing the firm's industry-leading profits.

The company is also investing heavily in R&D to develop autonomous driving software with no guarantee these investments will bear fruit. Tesla’s CEO Elon Musk effectively owns a around 20% of the company's stock and uses it as collateral for personal loans, which raises the risk of a large sale to repay debt.

At a recent price of around US 380 per share, Tesla commanded a 1 star Morningstar rating out of five.

Tesla (NAS: TSLA)

  • Moat Rating: Narrow
  • Fair Value estimate: USD 210 per share
  • Share price on January 2: USD 380
  • Star rating: ★

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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 about finding different sources of 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.