Tesla stocks
Tesla shares are expected to fall 2% at the open, while the rest of the market struggles with financial results (there’s a mix of results with Citi up 3% and JPMorgan down 1.2%). Spooz is up about 3 points.
The drop in Tesla shares comes after an 8% drop yesterday, which came on the heels of a dramatic 11-day rally.
UBS’s sell target is $197 because they say the stock is sold out too soon:
It is becoming increasingly difficult to justify the assessment.
We are downgrading Tesla from Neutral to Sell. Tesla is more than just an auto company, and there are some positive developments (e.g. Energy, FSD) that add further support. This is increasingly important as the outlook for the auto business deteriorates. Tesla has always had a premium attached to it for other future growth opportunities, but that premium is hard to justify. That premium, as we mentioned, has widened on the FSD narrative. Although we differentiate between large-cap companies, at current levels, we still have a “heel” of over $500 billion for this future growth opportunity. Even on a 5-year horizon, that would imply a 5-year future value of $1 trillion. And that’s just to justify current levels; one would need to see a greater chance of seeing upside from here. In a high interest rate environment, the cost of progress and investment is expensive, and the pace of improvement may also be long-term. If the market exits the growth mindset, or AI dwindles, this could impact TSLA’s multiples and the market may actually focus on other new opportunities that could be realized over a longer time horizon (or not at all), with the stock at 86x NTM P/E, and downgraded to Sell.
When the previous cars contribution to the price is near its highest levels, it is a good opportunity to sell.
Our valuation attribution analysis shows that the market has (fairly consistently) priced Tesla’s core auto business at between $60 and $90 per share. The “other attribution” has been volatile but at its peak in the past was around $140 per share. With the recent rally, this is now around $175 per share. This is higher than we’ve seen in the larger equity contributor, and suggests less downside. Our SOTP view values auto at around $57, and energy, which has shown strong recent improvements (and higher margins), at around $18. We value FSD/robo-taxi which we believe (see UBS Evidence Lab FSD survey inside), but this only represents around $93 of easily recognizable value, implying a premium/future option value of around 61% of today’s price.
Where could we go wrong? 1) Tesla’s price break from fundamentals has happened in the past and could continue for some time. 2) Q2 2024 results could be above expectations, causing positive revisions to the 25/26E which would help maintain momentum. 3) Energy – Tesla is showing strong growth in storage, which should lead to higher numbers over time, although we believe Tesla is making progress on its technology initiatives and should generate improved gross margins, near-term challenges (negative impact), and most importantly the market has always loved the new car, which could change the 25/26E numbers. But the consensus is already pricing in higher levels, and we believe the car could put pressure on automotive margins.