Moody’s Investors Service recently assigned a Baa3 long-term issuer rating to Tesla, and withdrew the Ba1 corporate family rating as well as the SGL-1 speculative grade liquidity rating. The outlook is stable. Tesla‘s financial policy is expected to remain prudent, with financial leverage well below 1 time.
Tesla‘s product offering is growing, with early production of Cybertruck slated for later this year. The development of a next generation vehicle at a targeted 50% reduction in cost holds the prospect for a meaningful decrease in the reliance on the earnings contribution of Model 3 and Model Y. Tesla‘s growing scale, regional production facilities, and heightened focus on the efficiency of its manufacturing processes support an EBITA margin that Moody’s expects to be 15.8% in 2023.
Moody’s anticipates that Tesla will deliver nearly 1.8 million vehicles in 2023, a 34% increase compared to the 1.3 million vehicles it delivered in 2022. Considerable investments in new vehicle and battery cell production facilities enable a steep increase in vehicle deliveries.
Moody’s expects Tesla‘s financial policy to remain prudent, as the company maintains an industry leading EBITA margin in the next 12 months, albeit still largely reliant on only two models. Further, Moody’s anticipates that liquidity will remain very good, underpinned by a very sizeable and growing balance of cash and investments, prospects for free cash flow of more than $7 billion, and limited debt maturities in the next two years.
The stable outlook reflects Moody’s expectation that Tesla will continue to capitalize on robust growth in global demand for battery Electric vehicles but in an increasingly competitive environment. The rating could be upgraded if Tesla maintains a strong competitive global presence, reduces its reliance on the earnings contribution of Model 3 and Model Y, and is able to sustain an EBITA margin in the high-single digits, as well as a longer track record of a consistent, prudent financial policy.
The rating could be downgraded if demand for Tesla models materially softens amid an expanding offering of battery Electric vehicles by other automakers, or if Tesla is unable to sustain its EBITA margin in the mid-single digits. A material shift in Tesla‘s financial policy that signals a greater tolerance for financial risk could also cause a ratings downgrade, including if debt/EBITDA is greater than 3 times, or if the amount of cash, investments, and committed revolver availability decreases considerably from current levels.
Overall, Moody’s Investors Service’s decision to assign a Baa3 long-term issuer rating to Tesla is a positive development, as it reflects the company’s strong presence in the global market and its ability to deliver vehicles to customers. Further, Tesla‘s prudent financial policy and growing scale will help the company maintain an industry leading EBITA margin in the next 12 months, which is a positive indicator for the company’s future prospects.