Tesla Stock Undervalued, Fair Value Estimate Unchanged Following Musk’s Share Sale

On Dec. 14 after the market close, Tesla (TSLA) SEC filings revealed that CEO Elon Musk sold nearly 22 million shares from Dec. 12 through Dec. 14. The shares sold were worth $3.58 billion, and the proceeds will probably be used to supply additional funds to Twitter, which Musk acquired in late October.

During those three trading days when Musk was selling, the stock was down over 12% from the Dec. 9 closing price, while the Morningstar US Market Total Return Index was up roughly 1.6% for the same period. With no company-specific news other than Musk’s stock sales, we see no reason to change our Tesla forecast. As such, we maintain our $250 fair value estimate and narrow moat rating.

At current prices, we view Tesla shares as undervalued, trading in 4-star territory. We see two key market concerns that are likely weighing on the stock. First, Musk’s funding of Twitter could continue to affect Tesla shares, since some potential investors may want to avoid the stock while it is still unclear whether Musk may need to sell more shares. This overhang could continue until Musk assures the market that Twitter has permanent financing secured and no longer needs additional investment capital. We think this probably includes a new Twitter CEO being named, which would allow Musk to spend more time managing Tesla.

Second, we think the market is concerned that a near-term global economic slowdown and the reduction of electric vehicle subsidies in key markets such as China and some EU countries will hurt demand for Tesla’s cars. However, Tesla should benefit from the U.S. federal subsidy for its Model 3 vehicle as a result of the Inflation Reduction Act. Given this and the company’s relatively small volume of 1.2 million deliveries on a trailing 12-month basis, there is still likely to be strong demand even in an economic slowdown. We continue to forecast that Tesla will deliver nearly 1.4 million and 2.1 million vehicles in 2022 and 2023, respectively.