Key Morningstar Metrics for Tesla
Tesla TSLA shares sold off on the news that DeepSeek, a Chinese AI company, released R1, an open-source reasoning model, earlier this month. The model’s capabilities roughly match those of advanced models by OpenAI, Anthropic, and Alphabet GOOGL/GOOG while having materially lower training costs.
Why it matters: Tesla aims to become a market leader in autonomous driving and Robotaxi services, where value comes from autonomous driving software. R1’s entrance creates a competition risk for these businesses.
R1’s impressive performance/cost dynamics have raised investor eyebrows concerning the necessity of the billions of dollars of capital expenditures on building out AI-related capabilities. R1 or another low-cost competitor could disrupt the nascent autonomous driving space.
The bottom line: We maintain our fair value estimate of $210 per share and narrow moat rating for Tesla. We think the firm’s advantage in autonomous driving software comes from the billions of miles of full self-driving software testing and its ability to process that data to improve the software, not the AI cost.
At current prices, we view Tesla shares as significantly overvalued, with the stock trading nearly 90% above our fair value estimate, in 1-star territory.Tesla does not compete in large language models. CEO Elon Musk also owns the AI company xAI, which created the LLM Grok. Musk has said there is little overlap between Tesla’s autonomous driving software and Grok; we think the same applies to Tesla and R1.
Coming up: Tesla will report its quarterly earnings on Jan. 29, after the market close. We expect an update on its FSD software.
We hope management will share a new timeline for the planned rollout of the unsupervised FSD, a Level 3 product wherein the software controls the primary driving functions.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
