Heading into earnings, is Tesla stock a buy, a sell,…

On January 27, 2025By Littum

Tesla TSLA will release its fourth quarter earnings report on January 29. Here’s Morningstar’s take on what to look for in Tesla’s earnings and stock.

• Morningstar rating: ★

• Economic Moat: Narrow

• Morningstar Uncertainty Rating: Very high

Earnings Release Date

• Wednesday 29 January 2025 after the close of business

What to watch for in Tesla’s Q4 earnings

• Gross profit for cars: Tesla’s 495,570 vehicles delivered was a quarterly record for the company. As a result, the company should benefit from operating costs from higher volumes. We also expect it to benefit from commodity deflation, although this may be partially offset by lower average selling prices.

• Advances in autonomous driving software: By 2025, Tesla aims to launch its Level 3 Full Self-Driving (FSD) unattended software in California and Texas and roll out its Level 2 FSD supervised software in Europe and China. These are important milestones for the management’s vision of a Robotaxi service.

• New vehicle launch: Tesla plans to launch a smaller SUV, dubbed the Model Q, later this year. This vehicle will likely be priced in the mid-$30,000 range and allow Tesla to compete in the affordable SUV market. We see this as key to Tesla’s delivery growth in 2025 and beyond, so we’ll be looking for updates on the timeline and any details that management will share.

• Energy production and storage growth: The energy production and storage company had record battery storage rollouts by 2024. This company recently opened a new factory in China that aims to double its production once it ramps up. We await the management’s growth plan for this company.

Tesla stock price

Source: Morningstar Direct.

Fair Value Estimate for Tesla

With its 1-star rating, we believe Tesla’s stock is significantly overvalued compared to our long-term fair value estimate of $210 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. In 2024, Tesla’s deliveries came in at 1.79 million, slightly below the 1.81 million achieved in 2023. In 2025, we expect deliveries to return to growth as the affordable vehicle launches mid-year. However, we predict that deliveries will come under the management’s guidance for a growth of 20-30%.

Tesla stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct.

Financial Moat Rating

We assign Tesla a narrow moat based on its intangibles and cost advantages. The company’s strong brand equity as a luxury automaker commands high prices, while its expertise in manufacturing electric cars allows it to make its vehicles cheaper than competitors.

We see the potential for Tesla to earn its cost of capital over at least the next 20 years, which is the metric we use for a broad moat valuation. However, the second 10-year period holds significant uncertainty for both Tesla and the broader auto industry, given the rapid development of autonomous vehicle technologies that could change how consumers use vehicles. As such, we see a narrow moat valuation, which assumes a 10-year excess return duration, as more appropriate.

Financial strength

Tesla is in excellent financial health. Cash, cash equivalents and investments were over $33.6 billion and far exceeded total debt per year. September 30, 2024. Total debt was about $7.4 billion, while total debt excluding vehicle and energy product financing (nonrecourse debt) was just over $10 million.

To finance its growth plans, Tesla has historically used lines of credit, convertible debt financing and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity offerings. We think this makes sense, as financing 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 declines in demand based on economic conditions. As the market leader in electric vehicles, Tesla is vulnerable to increasing competition from traditional automakers and new players. As new cheaper electric cars hit the market, the company may be forced to continue cutting prices, cutting into its industry-leading profits. With more EV choices, consumers may view Tesla less favorably.

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

TSLA Bulls Say

• Tesla can disrupt the automotive and power generation industries with its technology for electric vehicles, 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 fully 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 by other automakers.

TSLA Bears says

• Traditional automakers and new entrants are investing heavily in EV development, resulting in Tesla seeing a slowdown in sales growth and lowering prices due to increased competition, eroding profit margins.

• Tesla’s reliance on batteries made in China for its cheaper Model 3 vehicles will hurt sales, as those cars will not qualify for U.S. subsidies.

• The prices of solar panels and batteries will fall faster than Tesla can reduce costs, resulting in little or no profit for the energy production and storage business.

This article was prepared by Gautami Thombare.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar Editorial Policies.