Tesla: the price already pays for the bull case, and the car business is shrinking
We initiate on Tesla at Sell with a $260 target, 30% below the $373.71 price. The price pays $278 a share for robotaxi and Optimus, twice the $139 we can support, while the car business shrinks: FY25 deliveries fell 8.6%4 (source: Tesla 8-K delivery and production reports, 1Q22–3Q26) and operating income 38%1 (source: Tesla 10-K for FY25).
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Key takeaways
- The price pays $278 a share for robotaxi and Optimus; we value them at $139, and the rest of Tesla is worth $96 a share.
- The car business is shrinking: FY25 deliveries fell 8.6% to 1.64m4 (source: Tesla 8-K delivery and production reports, 1Q22–3Q26) and operating income 38% to $4.36bn1 (source: Tesla 10-K for FY25); 3Q26 deliveries fell 2.1% to 486,5324 (source: Tesla 8-K delivery and production reports, 1Q22–3Q26).
- Automotive gross margin ex-credits fell from 30.0% in 1Q22 to 16.3% in 2Q263 (source: Tesla quarterly shareholder updates, 1Q24–2Q26), with cost of goods near $35,000 a vehicle for four years2 (source: Tesla earnings-call transcripts, 1Q24–2Q26, including the 2Q26 call of 22 July 2026).
- Capex of $51.0bn over FY26E–FY27E takes free cash flow to −$15.0bn; consensus models +$2.4bn of FY27E free cash flow6 (source: Yahoo Finance price, consensus and ownership data, 20 October 2026).
- We initiate at Sell with a $260 target, the 25/55/20 weighting of bull $430, base $235 and bear $110; there is no prior rating.
Investment thesis
Tesla's value sits in businesses it has not built. The price pays $278 a share for robotaxi and Optimus; on 380,000 unsupervised miles and fleets of dozens of cars per city, we can support $139. The car business cannot fill the gap: deliveries fell 8.6% in FY254 (source: Tesla 8-K delivery and production reports, 1Q22–3Q26), and automotive gross margin ex-credits of 16.3% is structural, with cost of goods near $35,000 a vehicle for four years2 (source: Tesla earnings-call transcripts, 1Q24–2Q26, including the 2Q26 call of 22 July 2026). Energy is real and compounding, and the one place we are above consensus, but at $23 a share and 13% of revenue it cannot carry the group.
Valuation
Sum of the parts: automotive at 12x FY27E EBITDA ($161bn), energy 16x ($90bn), services 9x ($26bn), FSD by DCF ($73bn), robotaxi ($400bn) and Optimus ($150bn) probability-weighted at 10.5%, plus $28.5bn of FY26E net cash, gives $235 a share. Weighting bull $430, base $235 and bear $110 at 25/55/20 gives $259, rounded to the $260 target. A DCF at 10.5% WACC and 3.0% terminal growth gives $67; the gap is option value.
Our estimates
| Line | FY26E | FY27E | FY28E |
|---|---|---|---|
| Revenue | $108.6bn | $122.5bn | $137.0bn |
| Consensus | $107.2bn | $121.7bn | — |
| Ours vs consensus | +1.3% | +0.7% | — |
| EPS | $1.70 | $1.99 | $2.26 |
| Consensus | $1.74 | $2.17 | — |
| Ours vs consensus | −2.3% | −8.3% | — |
Risks to our view
- Chinese price war: a further 5pp of average selling price deflation would cut $35 a share.
- Upside risk: robotaxi scales faster than modelled; a national permit or a 10,000-car city would add about $170 a share.
- Upside risk: FSD at $1,500 a year and 65% attach would be worth $90 a share more.
- Upside risk: FY27 capex guidance below $20bn would restore free cash flow and add $45 a share.
- Upside risk: a sub-$25,000 car at a 15% margin could add 400k units, worth $38 a share.
Sources
- 1Tesla 10-K for FY25
- 2Tesla earnings-call transcripts, 1Q24–2Q26, including the 2Q26 call of 22 July 2026“the march of nines of reliability”
- 3Tesla quarterly shareholder updates, 1Q24–2Q26
- 4Tesla 8-K delivery and production reports, 1Q22–3Q26
- 5Tesla 10-Q for 2Q26
- 6Yahoo Finance price, consensus and ownership data, 20 October 2026
- 7Tesla 10-K for FY21–FY24
- 8Tesla definitive proxy statement 2026 (DEF 14A)
- 9Tesla Form 4 filings to 20 October 2026
- 10S&P 500 index data, Yahoo Finance
- 11Penmark Research model, 21 October 2026