Tesla Reports Sequential Fall in Deliveries; Shares Slightly Undervalued

Tesla (TSLA) reported second-quarter deliveries of 254,695 vehicles, up nearly 27% versus the prior-year quarter but down nearly 18% versus the first quarter of 2022. The number was in line with our view for the cadence of the year. Given COVID-19-related lockdowns that temporarily halted production at the company’s Shanghai factory, we had expected second-quarter deliveries would fall as a result of lower production. We expect the second half of the year will bring two quarters of record production, with Shanghai back up and running and the recently opened Austin and Berlin factories expanding production each week. As a result, our 2022 deliveries forecast of over 1.5 million vehicles is unchanged. With our outlook intact, we maintain our $750 fair value estimate. Our narrow moat rating is also unchanged.

At current prices, we view Tesla shares as slightly undervalued, trading nearly 10% below our fair value estimate but in 3-star territory. We recommend investors wait for a larger margin of safety before considering an entry point.

Tesla plans to release full second-quarter results on July 20 after the market close. We continue to expect the second quarter to be the low point of the year. Given the sequential fall in deliveries, revenue is likely to fall as well. As a result of the lower Shanghai production and the ramp-up of the two new factories, profits will probably see an outsize decline. However, as production ramps up, we expect profits will grow sequentially as the two new factories go from operating at a loss to contributing to profit growth over time.

Over the long term, we expect automotive gross profit margins will grow from the 29% achieved in 2021 to 38% by the end of the decade as Tesla is able to reduce its manufacturing cost per vehicle and increase higher-margin revenue from its autonomous driving software subscriptions.