After earnings, is Tesla stock a buy, a sell, or fairly valued?
Tesla TSLA released its third-quarter earnings report on Wednesday, Oct. 22. Here’s Morningstar’s take on Tesla’s earnings and stock.
Key Morningstar Metrics for Tesla
- Fair Value Estimate: $300.00
- Morningstar Rating: ★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Very High
What we thought of Tesla’s Q3 earnings
Tesla’s third-quarter earnings reflected sequential improvement driven by record auto deliveries and energy storage deployments. Yet shares were down 4% on Oct. 22 in after-hours trading as the market reacted to the near-term uncertainty for deliveries.
Why it matters: Selling electric vehicles is Tesla’s largest business. The expiration of the US EV tax credit in September is likely to weigh on EV sales over the next year. As Tesla is the US EV sales leader, Tesla will likely see lower near-term deliveries.
- The market may also be reacting to management’s delay in the outlook for the full launch of its robotaxi product, which was initially set for 2026. Tesla is expanding its robotaxi testing to more cities. But the earnings call confirmed our view that a full launch would likely be delayed.
- Tesla is also facing increased competition in its energy generation and storage business. We think this will lead to a slower growth rate over time as more battery producers sell to the utility-scale battery market.
The bottom line: We raise our fair value estimate for narrow-moat Tesla to $300 per share from $250. The primary drivers are a higher robotaxi valuation and increased long-term adoption of Tesla’s autonomous driving software.
- During the earnings call, management said it would remove Tesla employees in its robotaxi vehicles starting in its Austin, Texas, testing area. This gives us confidence that the software is improving to the point where robotaxis and subscriptions will generate improved long-term free cash flow.
- At current prices, we view Tesla shares as overvalued, with the stock trading roughly 40% above our updated fair value estimate and in 2-star territory. We recommend investors wait for a larger pullback and for the stock to offer a margin of safety before considering an entry point.
Fair Value estimate for Tesla
With its 2-star rating, we believe Tesla’s stock is moderately overvalued compared with our long-term fair value estimate of $300 per share. In 2025, we forecast deliveries will fall to 1.63 million versus the 1.79 million deliveries in 2024. Through the first three quarters, deliveries are down roughly 6% versus 2024. Due to the US EV tax credit expiration in September, we see lower deliveries in the fourth quarter of 2025 and in 2026. As Tesla is ramping up production of its new, lower-priced Model Y and Model 3 vehicles, we expect automotive gross margins excluding credits will remain in the mid-teens, below management’s long-term goal of 20%.
Economic Moat Rating
We award Tesla a narrow moat rating, stemming from the firm’s 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.
Financial strength
Tesla is in excellent financial health. Cash, cash equivalents, and investments were nearly $42 billion and far exceeded total debt as of Sept. 30. Total debt was around $7.5 billion, but total debt excluding vehicle and energy product financing (nonrecourse debt) was less than $5.0 million.
Tesla’s growth going forward will be largely self-funded. With its positive free cash flow generation and large cash balance, we think it should be able to easily fund its growth plans in the coming years. Historically, the company used credit lines, convertible debt financing, and equity offerings to raise capital. However, management has stated a preference to pay down all debt over time and has essentially achieved its goal.
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 an EV market leader, Tesla is subject to growing competition from traditional automakers and new entrants. As new lower-priced EVs enter the market, Tesla may have to cut prices, reducing the firm’s industry-leading profits. With more EV choices, consumers may view Tesla less favorably.
The company is also investing heavily in R&D to develop autonomous driving software, robotaxis, and humanoid robots, with no guarantee these investments will bear fruit. As of the last SEC filing, Tesla’s CEO owns roughly 12% of the company’s stock and uses it as collateral for personal loans, which raises the risk of a large sale to repay debt.
TSLA bulls say
- Tesla has the potential to disrupt multiple industries with its technology for EVs, AVs, batteries, and humanoid robots.
- 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 a robotaxi service, 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, which will result in Tesla seeing a deceleration in sales growth and being forced to cut prices due to increased competition, eroding profit margins.
- Tesla’s large investment into autonomous driving software will be value-destructive, as the robotaxi product will face delays and competition from Waymo, which already offers a robotaxi service.
- Tesla CEO Elon Musk’s political activities will turn consumers away from buying a Tesla in key markets including the US and Europe, leading to lower sales and profits.