Tesla Earnings: Price Cuts Weigh on Margins While Cybertruck Launch Officially Scheduled

Key Morningstar Metrics for Tesla TSLA

• Fair Value Estimate: $210.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

What We Thought of Tesla’s Earnings

Tesla’s earnings showed the effect of the company’s price cuts as operating income fell more than 50% from the prior-year quarter despite 9% year-over-year revenue growth. Our annual forecast had already included the profit decline as we expected price cuts would continue to weigh on profits and margins.

However, we have trimmed our near-term forecast to account for further price cuts in the fourth quarter and lower margins in 2024 as Tesla ramps up Cybertruck production.

Our long-term outlook remains intact that Tesla will be able to fully restore automotive gross profit margins as the company is able to reduce its unit production costs and ramp up sales of its autonomous driving subscription software.

Having updated our model to reflect our lower near-term outlook, we have trimmed our fair value estimate on Tesla stock to $210 per share from $215 per share. Our narrow moat rating is unchanged.

Tesla’s stock was down over 4% in afterhours trading as the market reacted negatively to the profit decline and management’s commentary that suggests lower automotive gross profit margins next year. However, at current prices, shares trade roughly 10% above our updated fair value estimate. Accordingly, we suggest investors wait for a larger pullback in the stock and for shares to offer a solid margin of safety before we recommend an entry point.

Tesla plans to begin Cybertruck deliveries at the end of November while ramping up production of the light-duty truck. Similar to the Model 3 ramp-up, we think automotive profit margins will likely be temporarily affected by higher initial unit production costs in the remainder of 2023 and in 2024. However, as production scales, the truck should become profitable and help drive margin expansion in the following years.