Shares of Tesla are poised for a 2% decline at the open as the rest of the market wrestles with results from financials (mixed bag there with Citi +3% and JPM -1.2%). Spoos are up 3 points.
The decline in TSLA follows an 8% drop yesterday that came on the heels of a sensational 11-day rally.
The sell target from UBS is $197 as they say the stock ran too much and too soon:
Increasingly difficult to justify valuation
We are downgrading TSLA from Neutral to Sell. TSLA is more than just an auto company, and there are some positive developments (e.g. Energy, FSD) that add additional support. This is increasingly important as expectations for the Auto business deteriorate. TSLA has always had a premium attached to it for other, future, growth opportunities, but that premium is difficult to justify. This premium has widened as noted we believe, on an FSD narrative. Although we differentiate between businesses of substantial value, at current levels, we are still left with a >$500bn "stub" for that future growth opportunity. Even if this is a 5-year time horizon, that implies a 5-year future value of $1T. And this is just to justify current levels; one would need to see an even larger opportunity to see upside from here. In a higher interest rate environment, the cost of making progress, investment is costly, pace of improvement may also be payoff is long. If market exits a growth mindset, or AI diminishes, this may impact TSLA's multiple and indeed it may be that market focuses on other new opportunities realizable on a longer time horizon (or not at all), with the stock at 86x NTM P/E, downgrade to Sell.
When ex-auto contribution to price nears the highs, good opportunity to sell
Our valuation attribution analysis shows that the market has (fairly consistently) valued TSLA's core auto business between $60-$90/share. The "other attribution" has been volatile but at past peaks was a ~$140/share. With the recent run-up, this is now ~$175/share. This is above what we've seen in shares larger contribution, and implies a lower trend down. Our SOTP view values auto at ~$57, Energy, which shows recent strong improvements (and higher margin) is worth ~$18. We estimate FSD/robo-taxi which we think (see UBS Evidence Lab FSD survey inside), but that's only ~$93 of the more easily identifiable value, implying a premium/future option value that is ~61% of today's price.
Where could we be wrong? 1) TSLA price disconnection from fundamentals has occurred in the past and can persist for a while. 2) 2Q24 results may be above expectations, causing positive revisions to 25/26E helping to sustain momentum. 3) Energy- TSLA is demonstrating strong growth in Storage, which should result in upside to numbers over time, although we believe TSLA is making headway in its technological initiatives and should generate improved gross margins, near-term challenges (negatively impact), importantly market has always liked the new vehicle, as that could change the 25/26E numbers. But consensus already considers higher levels, and we believe the vehicle could pressure auto margins.
