Raising Tesla Stock’s Fair Value Estimate to $225 on Improved Outlook Following Investor Day

Tesla Stock at a Glance

• Current Morningstar Fair Value Estimate: $225
• Tesla Stock Star Rating: 3 stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Tesla Investor Day Update

After updating our outlook after Tesla’s TSLA investor day, we raise our fair value estimate to $225 per share from $220. The increase is due to our improved long-term outlook for the company’s free cash flow generation. Our narrow-moat rating is unchanged.

Tesla Stock Slightly Undervalued

At current prices, we view Tesla shares as slightly undervalued, with the stock trading roughly 15% below our fair value estimate. We attribute the selloff to the market’s disappointment at the lack of details surrounding the new affordable vehicle platform as well as the lack of publicly stated long-term financial targets. We agree with the sentiment that the entry-level vehicle is not likely to be in commercial production over the next couple of years, which should lead to lower deliveries and profits in the medium term. However, we forecast Tesla will eventually bring this new model into production, driving long-term deliveries growth.

Tesla’s Ability to Scale

In our view, the more important takeaway from the event is that Tesla’s ability to scale should drive higher long-term free cash flow generation. Tesla’s software-focused operation, including using AI for much of its R&D, should drive long-term operating leverage, leading to margin expansion. The company’s plan to simplify its manufacturing process should reduce its capital expenditure intensity over time. As a result, we reduced our long-term assumptions for overhead expenses and capital expenditures.

Additionally, we increased our outlook for the energy generation and storage business as we think Tesla’s software, including virtual machine mode and autobidder, will drive higher sales as it will allow excess cost savings versus the installation of solar and a battery alone.

Finally, during the event, Tesla reiterated its long-term plan to sell 20 million vehicles per year. Our vehicle deliveries forecast is unchanged at a little more than 5 million deliveries in 2030.