TSLA upgraded from hold to buy last week on expectations of an all-share SpaceX merger at a premium possibly above 20%, enough to win Tesla holders since Musk holds only a 20% stake; margins heading to the 20s and maybe above 30% in a few years; product delays do not change decade-out growth.

Tesla's stock is slowing down, even though its results exceeded expectations. So, they posted adjusted earnings of 48 cents per share on revenues of $28 billion . These results exceeded expectations in both profits and revenues.

But in detail, revenues in the automotive sector decreased by 3%.

Overall, we thought the results were better than expected for several reasons. Gross profit margins – this is the area where the company really excelled. An increase of 170 basis points over expectations.

The free cash flow was actually positive. The market was expecting a negative free cash flow figure because their capital expenditures were slightly lower. Also, full self-driving subscriptions grew by 67% year-on-year. This is very strong and impressive growth.

This is somewhat in line with the narrative and optimism surrounding Tesla, which is that the revenue mix will shift over time to products and services with much higher profit margins, such as subscriptions to fully autonomous driving software .

This is a major reason why the margins came in much higher than expected.

Overall, on the earnings call, Musk lowered capital expenditure guidance from $25 billion this year to about $20 billion. So, in the near term, this is positive for free cash flow, but it also means that their spending will likely be higher in 2027 than it otherwise would have been.

We believe so. In fact, we believe it came in at slightly less than 20%, and we see their profit margins heading towards the twenties, and perhaps approaching more than 30% over the next few years.

It is really driven by this impressive growth in fully autonomous driving. They continue to improve the product with each new update. The product becomes much better and more attractive to consumers.

Therefore, we believe this will be the real driver for the company's transformation from an inherently low-margin car manufacturer to a more software and services provider.

They are investing heavily in artificial intelligence, self- driving taxis, and " Optimus" robots. We've followed Tesla long enough to know that you should take everything Musk says with a grain of salt regarding timing.

He usually keeps his word , but rarely sticks to the initial timetable he sets. For example, the new "roadster " they unveiled last week, they said it would go into production in 2028.

In fact, we would be really surprised if we saw that car before 2030. And that is really the case with all of their new portfolio products. But in the long run, this does not change the company’s overall growth, or what revenues and profits will look like a decade from now .

But we believe the main driver is full autonomous driving. The stock's greatest value lies in its potential for a global autonomous driving market . They continue to obtain approvals.

We believe they will get EU-level approval in approximately the first half of 2027. Progress is also being made towards obtaining approval from the U.S. Department of Transportation .

Does this create greater value for Tesla shareholders?

We have long believed that this is part of Elon Musk’s plan to merge his companies into one large company called “Elon Inc.”, so we expect the committees to recommend moving forward with the merger.

This really puts Tesla in a special position as a stock. SpaceX is a larger company, significantly larger than Tesla. Therefore, they will have to make an offer for Tesla shares.

We assume it will be an all-share merger, and profitable enough to secure a majority vote from Tesla shareholders. Currently, Elon Musk owns only a 20% voting stake in Tesla. While he owns more than 80% of the voting rights in SpaceX.

Therefore, we assume that SpaceX's approval is guaranteed, but it actually needs to gain the support of an additional 30% of Tesla shareholders. To achieve this, SpaceX's offer must be attractive enough, with a sufficient price premium to guarantee the approval of a majority of Tesla shareholders.

It may not be the traditional 30% acquisition premium we see in many mergers, but we wouldn't be surprised if it were in the range of over 20%. This is why we upgraded the stock last week from "hold" to "buy," largely based on merger expectations and the premium offered.

So, how would you rate Tesla? It's extremely difficult. Analysts have always struggled with this since the company's founding, but the offering must be attractive enough to convince shareholders who may be skeptical, or who believe Tesla might be better off as an independent company.