Raising Our Tesla FVE on Improved Near-Term Outlook

Tesla TSLA delivered impressive third-quarter results as operating profits soared nearly 150% versus the prior-year quarter. The growth was driven by a 73% increase in vehicles delivered and lower costs, with gross and operating margins reaching record highs. We have increased our near-term outlook to incorporate improved automotive gross margins and lower overhead expenses over the next few years. Our long-term outlook, which had assumed increased profit margins, is intact. Having updated our model to reflect these changes, we're raising our fair value estimate to $650 per share from $600. Our narrow moat rating is unchanged. We currently view Tesla shares as overvalued on a risk-adjusted basis, trading over 30% above our fair value estimate and in 2-star territory. One of the biggest drivers of our valuation is the number of vehicles delivered in 2030, the last year of our 10-year explicit forecast. We forecast 5.4 million vehicles to be delivered, which represents a 27% annual average growth rate from the roughly 500,000 vehicles delivered in 2020. However, this is well below management's goal of a sustained 50% annual growth rate. Tesla generated automotive gross margins of 28.8% excluding regulatory credit sales, up 510 basis points versus the prior-year quarter. The expansion was driven by lower costs, as average vehicle sale prices fell 6% year on year during the quarter due to a mix shift toward lower-priced vehicles. As Tesla begins to implement its lower-cost 4680 battery cells, we expect gross margins will see another step change to the mid-30s over the next several years. During the earnings call, management confirmed our view on the insurance business. Tesla should be successful by optimizing insurance pricing using the car's computer to determine driver riskiness. We think insurance sales will eventually generate the majority of sales and all profits from the services and other segment.

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