Tesla 1Q26 results beat expectations, but the rating remains Equal-weight

Overview

This report is Morgan Stanley's updated commentary on Tesla Inc.'s 1Q26 results. The core conclusion is that quarterly financial results were clearly better than expected, especially auto and energy gross margins, operating profit, adjusted EBITDA, adjusted EPS, and free cash flow, all of which exceeded both Morgan Stanley's and market consensus expectations. However, the report emphasizes that part of the margin improvement came from one-off factors, and capital expenditures could rise in 2Q26 as computing resources, Terafab, and Solar projects advance; therefore, the Equal-weight rating and $415 price target are maintained.

Core views

The report believes the 1Q26 results bring a moderately positive revision to the investment thesis: revenue was stronger than expected, margins broadly improved, and free cash flow was significantly better than feared; meanwhile, long-term growth narratives including FSD, Robotaxi, Cybercab, and Optimus continue to progress. But because one-off gains contributed meaningfully to quarterly margins, and future capital expenditures as well as autonomous driving/robotics commercialization still face execution, regulatory, and competitive risks, Morgan Stanley did not upgrade the rating.

Analysis framework

The report uses earnings variance analysis and a sum-of-the-parts valuation framework: it first compares 1Q26 revenue, gross margin, operating profit, adjusted EBITDA, EPS, free cash flow, and capital expenditures item by item against Morgan Stanley estimates and market consensus expectations, and then breaks down the $415 target price using a sum-of-the-parts method across core auto, Network Services, Tesla Mobility, Energy, and Humanoids.

Methodology notes

• Valuation methodsSum-of-the-parts valuation

  The target price consists of five parts

  The $415 target price includes core auto at $45/share, Network Services at $145/share, Tesla Mobility at $125/share, Energy at $39/share, and Humanoids at $60/share.

• Operating trackingEarnings variance analysis

  Actual results versus MSe and consensus expectations

  The report compares 1Q26 actual revenue, gross margin, operating profit, adjusted EBITDA, adjusted EPS, free cash flow, and capital expenditures against Morgan Stanley estimates and market consensus expectations.

• Long-term growth assumptionsDCF and adoption-rate assumptions

  Long-term value of autonomous driving, mobility services, and robotics businesses

  Network Services assumes an 85% FSD attach rate by 2040 and ARPU of $240/month; Tesla Mobility is based on about 5mn vehicles and about $1.33/mile; Humanoids valuation applies a 50% probability discount.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TSLA.US

  Report-covered asset

  Strengths

  Revenue and margins were better than expected, free cash flow was far better than feared, and FSD subscriptions, Robotaxi miles, Cybercab pilot production, and Optimus production-line preparation provide long-term growth optionality.

  Weaknesses

  Part of the gross margin improvement came from one-off gains such as warranty and tariffs; 2Q capital expenditures could rise; the valuation contribution from the core auto business is relatively limited.

  Comparison

  1Q26 total revenue, operating profit, adjusted EBITDA, adjusted EPS, and free cash flow were all above Morgan Stanley estimates and market consensus expectations.

  Risks

  Execution risk in Robotaxi, FSD, and Humanoids; regulatory risk; China risk; intensifying competition; valuation and dilution risk.

• Auto business

  Core source of revenue and profit

  Strengths

  Auto revenue and auto gross margin excluding credits were both significantly above expectations.

  Weaknesses

  Core auto valuation is $45/share, with a lower long-term value contribution than software, mobility, and robotics-related businesses.

  Comparison

  Auto gross margin excluding credits was 19.2%, above the consensus estimate of 15.6% and MSe of 14.3%.

  Risks

  Traditional OEMs, Chinese automakers, and price competition could pressure margins.

• FSD / Network Services

  One of the core drivers of long-term valuation

  Strengths

  FSD active subscribers reached 1.28mn, and FSD miles driven approached 10bn.

  Weaknesses

  Commercialization still depends on unsupervised FSD capability, regulatory approval, and user adoption.

  Comparison

  Network Services contributes $145/share in the target price, the largest single source of valuation.

  Risks

  Risks related to technology deployment, regulatory approvals, consumer acceptance, and competition.

• Robotaxi / Tesla Mobility

  Long-term mobility services optionality

  Strengths

  Paid miles increased to about 1.7mn, and Cybercab entered pilot production.

  Weaknesses

  New city rollout remains in preparation, and the pace of commercialization is uncertain.

  Comparison

  Tesla Mobility contributes $125/share in the target price.

  Risks

  City launch timing, regulation, accident liability, operating costs, and scaling execution risk.

• Optimus / Humanoids

  Long-term growth optionality

  Strengths

  Optimus SOP is still expected in 2026, with production-line preparation underway in Fremont and Gigafactory Texas.

  Weaknesses

  The valuation already applies a 50% probability discount, indicating high commercialization uncertainty.

  Comparison

  Humanoids contributes $60/share in the target price.

  Risks

  Risks related to mass production, cost, demand validation, robotics competition, and technology maturity.

• Energy business

  Segment profit contributor and part of valuation

  Strengths

  1Q26 energy gross margin was 39.5%, significantly above expectations.

  Weaknesses

  Margins were helped by tariff-related one-off gains, so sustainability remains to be seen.

  Comparison

  Energy contributes $39/share in the target price.

  Risks

  Project timing, tariff impacts, and uncertainty around Solar- and Terafab-related capital expenditures.

Key data

• 1Q26 total revenue$22.39bnAbove Morgan Stanley's estimate of $20.78bn and the consensus estimate of $21.14bn.
• Auto gross margin excluding credits19.2%Above Morgan Stanley's estimate of 14.3% and the consensus estimate of 15.6%; includes some one-off gains and stronger FSD sales.
• Energy gross margin39.5%Above Morgan Stanley's estimate of 26.0% and the consensus estimate of 28.0%, helped by tariff-related one-off gains.
• Operating profit$941mn，margin 4.2%Above Morgan Stanley's estimate of $137mn and the consensus estimate of $451mn.
• Adjusted EBITDA$3.67bn，margin 16.4%Above Morgan Stanley's estimate of $2.80bn and the consensus estimate of $3.27bn.
• Adjusted EPS$0.41Above Morgan Stanley's estimate of $0.36 and the consensus estimate of $0.30.
• Free cash flow$1.44bnSignificantly better than Morgan Stanley's estimate of -$2.44bn and the consensus estimate of -$1.78bn.
• Capital expenditures$2.49bnBelow the consensus estimate of $4.00bn and Morgan Stanley's estimate of $3.59bn, partly because the timing of computing resource purchases is skewed toward 2Q.
• FSD active subscribers1.28mnUp 16% quarter over quarter and 51% year over year; FSD miles driven approached 10bn.
• Robotaxi paid milesabout 1.7mnAbove about 650k in December 2025; wording on new city rollout changed from 1H 2026 to in preparation.
• Target price$415.00Composed of five business valuations, with the stock rating maintained at Equal-weight.

Impact & implications

In the short term, the 1Q26 results reduce market concerns about margins and free cash flow, which may support the share price and modest upward revisions to earnings expectations. Over the medium to long term, investors still need to assess whether unsupervised FSD, Robotaxi city expansion, Cybercab mass production, Optimus production-line buildout, and the energy business can translate into sustainable cash flow. The report remains attentive to the growth narrative but stays relatively neutral in its rating.

Risks

• Commercialization execution risk in Robotaxi, FSD, and Humanoids.
• Regulatory risk, especially approvals related to autonomous driving and robotaxis.
• China market risk and competitive pressure.
• Competition from traditional OEMs, Chinese automakers, and large technology companies in automotive and robotics.
• Risk of rising capital expenditures, especially related to computing resources, Terafab, and Solar investments.
• Valuation risk and potential equity dilution risk.
• Quarterly margin improvement included one-off gains, creating uncertainty about sustainability.

What to watch

• Whether management updates 2026 capital expenditure guidance on the earnings call, especially whether the previous statement of more than $20bn changes.
• Whether 2Q26 capital expenditures rise materially due to computing resource purchases and progress in Terafab and Solar projects.
• Progress toward unsupervised FSD, growth in FSD miles driven, and sustainability of subscriber growth.
• Status of Robotaxi rollout into new cities, growth in paid miles, and the pace of Cybercab mass production.
• Production-line construction, SOP, and capacity path for Optimus in Fremont and Gigafactory Texas.
• The underlying level of auto and energy gross margins after one-off gains fade.