On Friday, UBS downgraded shares of Tesla Inc. (NASDAQ:TSLA) from Neutral to Sell, while simultaneously raising the price target to $197 from $147. The revision comes amid a reassessment of the electric vehicle and energy company's valuation, considering the broader market's anticipation of its growth prospects, particularly in artificial intelligence (AI).
The UBS analyst acknowledged Tesla's diversification beyond automotive manufacturing, highlighting positive developments in its Energy and Full Self-Driving (FSD) segments as factors providing additional support.
Despite these advancements, expectations for Tesla's core auto business are on the decline. The analyst pointed out that Tesla's valuation has traditionally included a premium for its potential growth in various initiatives. However, the challenge lies in accurately valuing such "optionality."
Tesla's premium has recently expanded, driven by heightened enthusiasm around AI. After evaluating Tesla's different business segments, UBS concluded that the current stock price leaves an implied value of over $500 billion for future growth initiatives.
To justify the current stock levels, a future value of $1 trillion would be needed within a five-year horizon, and even more to support a Buy rating.
The UBS analyst expressed concerns over the costly investments in AI technology, the unpredictable pace of improvement, and the long-term nature of potential returns. The firm cautioned that if the market's excitement for AI wanes, Tesla's stock multiple could be adversely affected.
With the current stock trading at 86 times next twelve months (NTM) P/E, the lack of visibility and the potential for growth opportunities to materialize later than expected—or not at all—warranted the downgrade to Sell.
In other recent news, Tesla has diversified its Model 3 lineup with a new rear-wheel drive long-range variant priced at $42,490. This addition is part of the company's strategy to offer a more affordable long-range option to consumers.
In another development, Tesla's anticipated Robotaxi service debut has been postponed from August to October. Furthermore, Tesla has adjusted the prices of its Model 3 vehicles across several European countries in response to tariffs imposed by the European Commission on China-made electric vehicles.
On the investment front, Morgan Stanley (NYSE:MS) has revised the valuation of Tesla's energy storage business to $50 per share, citing an expected global surge in electricity demand due to the rise of artificial intelligence technologies. This marks a significant increase from the previous estimate of $36 per share. Investment firm Oppenheimer has projected that Tesla's energy storage sales could surpass $3 billion in the current quarter.
Meanwhile, ARK Investment Management's CEO, Cathie Wood, has reassured investors about the firm's flagship fund strategy, despite recent underperformance. Wood expressed confidence in the fund's potential turnaround with a fall in interest rates. Among the fund's top investments as of May 31 were Tesla, Coinbase (NASDAQ:COIN), and Roku (NASDAQ:ROKU).
InvestingPro Insights
Amid UBS's downgrade of Tesla Inc. (NASDAQ:TSLA) and the market's focus on the company's AI prospects, InvestingPro's real-time data and analytics provide additional context. Tesla's market capitalization remains robust at $768.69 billion, reflecting its substantial presence in the industry. The company's P/E ratio, a key metric for investors, stands at 56.61, indicating a premium valuation that aligns with UBS's assessment of Tesla's growth expectations, particularly in AI and other initiatives.
From an operational standpoint, Tesla's gross profit margin over the last twelve months as of Q1 2024 is 17.78%, which underscores the challenges mentioned by UBS regarding the company's core auto business. However, Tesla's strong performance is evident in its 1-month and 3-month price total returns, boasting 35.95% and 40.91%, respectively. These returns highlight the market's recent positive reception to Tesla's prospects, despite the broader concerns.
InvestingPro Tips reveal that Tesla holds more cash than debt on its balance sheet and that analysts have revised their earnings upwards for the upcoming period, suggesting confidence in the company's financial health and future performance. Additionally, there are 19 more tips available on InvestingPro that can provide deeper insights into Tesla's financial and market position. For those seeking to leverage these insights, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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