Tesla released its second-quarter earnings report on July 22. Here’s Morningstar’s take on Tesla’s earnings and stock.
Key Morningstar Metrics for Tesla
- : USD 450.00Fair Value Estimate
- : ★★★★Morningstar Rating
- : NarrowMorningstar Economic Moat Rating
- : Very HighMorningstar Uncertainty Rating
What We Thought of Tesla’s Q2 Earnings
Tesla generated mixed second-quarter results as higher deliveries led to revenue growth, but increased expenses weighed on profits.
Why it matters: Tesla’s adjusted earnings per share came in below FactSet consensus estimates. Shares were down 4% in after-hours trading on this news and management’s outlook for capital expenditures to grow over the next three years.
- The increased capital expenditures are coming from Tesla building new factories to expand its vehicle and battery production and increased artificial intelligence compute, which is required to run Tesla’s autonomous driving and humanoid robot AI software.
- We view the heavy expenditures as Tesla laying the foundation for its real-world AI—namely autonomous vehicles and humanoid robots. While these new ventures are unlikely to generate meaningful results in the near term, we see strong long-term growth for both products.
The bottom line: We maintain our USD 450 fair value estimate for narrow-moat Tesla. We had already assumed capital expenditure would exceed USD 25 billion over the next three years and grow from there. So, management guidance for higher capex spending was already largely accounted for in our valuation.
- We think Tesla will be successful in developing autonomous driving software that it will monetize through its robotaxi ride-hailing service, its full self-driving software sold to Tesla owners, and an autonomous heavy trucking operation using Tesla’s semi-trucks.
- At current prices, we view Tesla shares as undervalued, with the stock trading roughly 20% below our fair value estimate. Tesla shares are down nearly 30% from their 52-week high. For long-term investors, we view the pullback as a good opportunity (all returns in this article are based on a US dollar basis).
Big picture: Tesla is investing heavily to become a leader in autonomous vehicles and humanoid robots. While the market is reacting to the near-term negative free cash flow, we see strong long-term growth from these new product developments.
The following are excerpts from Morningstar’s company report on Tesla stock.
Fair Value Estimate for Tesla
With its 4-star rating, we believe Tesla’s stock is moderately undervalued compared with our long-term fair value estimate of USD 450 per share. In 2026, we forecast deliveries will grow by roughly 10% to nearly 1.8 million, up from 1.64 million in 2025. With full self-driving beginning to be approved in an increasing number of European countries, we see strong European delivery growth more than offsetting a US decline. Longer term, we assume Tesla will deliver around 2.8 million vehicles per year in 2030, and the vast majority of deliveries will come from the Model Y and Model 3 platforms.
We expect Tesla’s robotaxi business will continue to progress through testing and enter multiple new cities in 2026, similar to how Waymo, Uber, and Lyft increased their service locations. In energy generation and storage, we assume the business averages annual revenue growth of roughly 25% during our 10-year forecast, primarily driven by accelerating demand for energy storage systems. To fund growth, we assume Tesla will spend over USD 350 billion in capital expenditures over the next decade.
Read more about Tesla’s fair value estimate.
Economic Moat Rating
We award Tesla a narrow moat, stemming from intangible assets and cost advantage. Tesla’s intangible assets are its brand and differentiated autonomous driving software technology. The company’s strong brand cachet as a luxury automaker and its proprietary autonomous driving software command premium pricing, while its electric vehicle manufacturing expertise allows the company to produce vehicles cheaper than competitors. Tesla’s proprietary technology contributes to its intangible asset-driven competitive advantage, and it has developed its software by investing in research and development.
With R&D spending in line with its peers, we think Tesla will be able to maintain its proprietary technological advantage. We think Tesla benefits from a cost advantage in US electric vehicle production thanks to its manufacturing scale. Even as EVs become profitable, we expect Tesla will retain its cost advantage, supporting higher gross profit margins versus its US automaker peers. All in all, we think Tesla’s combination of intangible assets and cost advantage will persist and allow the firm to generate excess returns on capital for at least the next 10 years.
Read more about Tesla’s economic moat.
Financial Strength
Tesla is in excellent financial health. Cash, cash equivalents, and investments were USD 43.5 billion and far exceeded total debt as of June 30. Total debt was a little less than USD 9.1 billion. Tesla’s growth going forward will be largely self-funded. With its positive free cash flow generation and large cash balance, we think Tesla should be able to fund its growth plans over at least the next two years without needing to raise debt. Historically, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. We think the company would have no problem raising debt if needed to fund its robotaxi and humanoid robot growth plans.
Read more about Tesla’s financial strength.
Risk and Uncertainty
We assign Tesla a Very High Uncertainty Rating, as we see a wide range of potential outcomes for the company. As new lower-priced EVs enter the market, Tesla has cut prices and offered lower-cost versions of its Model 3 and Model Y vehicles. Further price cuts could reduce profits. The company is also investing heavily in R&D and capital expenditures to develop autonomous driving software, robotaxis, and humanoid robots, with no guarantee these investments will bear fruit.
Tesla faces environmental, social, and governance risks related to potential product defects, including those in its autonomous driving software, that could result in recalls. We see a moderate impact should this occur. If Tesla is unable to retain key employees, such as CEO Elon Musk, its image as an innovative company could decline. We see a low probability but moderate materiality. Tesla may also face regulatory issues in some US states due to laws that require automakers and dealers to be separate. We see a moderate probability but low materiality.
Read more about Tesla’s risk and uncertainty.
TSLA Bulls Say
- Tesla could disrupt multiple industries with its technology for EVs, AVs, batteries, and humanoid robots.
- Tesla’s full self-driving software should generate growing profits in the coming years as the technology continues to improve, leading to a robotaxi service and increased adoption by Tesla drivers.
- Tesla’s humanoid robot will create shareholder value, as its ability to perform multiple functions will transform manufacturing and be useful to consumers.
TSLA Bears Say
- Traditional automakers and new entrants are investing heavily in EV development, which will result in declining deliveries. This will force Tesla to cut prices due to increased competition, eroding profit margins.
- Tesla’s large investment in autonomous driving software will be value-destructive as the robotaxi product will face delays and competition from Waymo, which already offers a robotaxi service.
- Musk’s political activities will turn consumers away from buying a Tesla in key markets, including the US and Europe, leading to lower sales and profits.
This article was compiled by Irza Waraich.
