We Are Cutting Our Price Estimate For Tesla, But Remain Positive On The Stock

We are reducing our price estimate for Tesla (NASDAQ:TSLA) from $272 per share to about $217 per share.  Now, Tesla’s execution has actually been solid this year, with earnings per share poised to almost double year-over-year, despite supply chain challenges. That said, there are multiple headwinds for the stock at present. For one, the demand picture is increasingly challenging. Tesla has slashed prices on its Model 3 and Y vehicles in the U.S. by $7,500 until the end of this year. Tesla has also resorted to discounts in China, and there are reports that the company is reducing its production schedule at its Shanghai plant for January. Price cuts of this magnitude (well over 10% of the vehicle’s sticker price) signal that demand for the company’s EVs is cooling off, meaning that Elon Musk’s forecast of 50% delivery growth over a multi-year period – a key assumption of many Tesla valuation models – looks uncertain. Separately, Elon Musk’s recent acquisition of Twitter also has big implications. Although Mr. Musk purchased the social media company in his personal capacity, the deal is clearly becoming a distraction, reducing his focus on the EV major. Although Mr. Musk has indicated that he would move away from his role as Twitter CEO, we do not think this will happen, given the sizable financial commitments he has made in the Twitter deal.

However, even post our price revision, our Tesla price estimate still remains considerably ahead of the current market price of $122.  We continue to believe that Tesla will remain a big beneficiary of the long-term transition to electric vehicles given its well-oiled supply chain, superior electric drivetrains, and its lead with software and self-driving technology.  Production capacity has traditionally been a big bottleneck for Tesla and the company has been addressing this,  with new factories in Texas and Berlin coming online and ramping up capacity. Tesla is also slated to bolster its model lineup. The Cybertruck pickup truck is likely to go into production in the coming year, while deliveries of the semi-truck recently started. Tesla’s margins are also among the highest in the auto industry and this should enable the company to be solidly profitable as sales improve further. At the current market price of $122 per share, Tesla trades at a mere 22x forward earnings, which we believe is very reasonable considering Tesla’s growth rates (the consensus analyst average is over 35% revenue growth rate for 2023). See our analysis on Tesla Valuation: Is TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla Revenue: How TSLA Makes Money.

[1] Month-to-date and year-to-date as of 12/29/2022
[2] Cumulative total returns since the end of 2016