Tesla's FVE Increase Still Leaves the Stock Overvalued

After rolling our Tesla TSLA model forward a year for the 10-K filing, we increase our fair value estimate to $349 from $306. The change is primarily from increasing our midcycle operating margin by 100 basis points to 13% and increasing our total vehicles delivered over our 10-year forecast period by about 25% to 28.4 million. The midcycle margin move is to give Tesla more benefit of the doubt that the investments laid out at its September 2020 Battery Day event will yield meaningful cost reductions over time and enable more economies of scale. The vehicles sold increase is a function of rolling the model, which removes a low roughly 500,000 2020 delivery figure from the forecast and replaces it with a 4.3 million unit figure in 2030. We’ve also kept delivery growth rates elevated off of a higher starting point in our forecast, which means 2024 deliveries are now at about 2.7 million versus about 2.1 million previously. We are taking our 2021 deliveries forecast down to 800,000 from 950,000 as we expect the semiconductor shortage impacting the auto industry to slow Tesla’s production. That is still about 60% growth from 2020 which is in line with guidance of growth this year above the firm’s planned annual growth rate of 50%. We model growth rates of at least 50% through 2023 but decline this rate to the mid-single digits by 2030.

CEO Elon Musk says that if Tesla executes well it can sell 20 million vehicles a year in the late 2020s. That is something we cannot yet model because it means Tesla would be about twice the size of where Toyota and Volkswagen are today. However, if Musk proves us wrong, modeling 20 million units by late this decade would change the fair value estimate, all else constant, to over $1,500. We believe the stock trades on the option value of what it may look like years from now rather than on fundamentals and free cash flow generation, so we think investors should consider the upside and downside risks should they want to chase momentum.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.