Tesla shares were up over 5% in after-hours trading, as we think the market reacted favorably to management guidance for at least 1.8 million deliveries in 2022, or around 40% growth. At current prices, we view Tesla shares as undervalued, with the stock trading in 4-star territory.
We updated our forecast for higher deliveries in 2023 to 1.8 million, from our prior forecast for 1.6 million. In light of Tesla's price cuts earlier this month, the company should see strong demand growth even amid an economic slowdown, particularly from the U.S., as Tesla's Model 3 and Model Y vehicles will generally be eligible for the Inflation Reduction Act tax credit.
However, we also updated our model to reflect a lower average selling price and profitability. Raw materials inflation drove a 250-basis-point contraction in automotive gross profit margins (excluding the sale of regulatory credits) versus the third quarter despite a slightly higher average selling price. Given Tesla's price declines announced in early January, and our view that lithium contract prices will rise in 2023—as spot prices average US$70,000 per metric ton—we expect automotive gross profit margins to contract further in 2023, partially offset by lower nonlithium raw materials prices in the second half of the year as Tesla's sourcing contracts reset. Over the long term we expect Tesla to drive gross margin improvement from lower raw materials prices and the full ramp-up of its new plants, including rising production of its in-house 4680 battery cell manufacturing operation.