Tesla Inc. faced a significant setback as UBS downgraded the stock to a sell rating, citing concerns that its shares have surged "too much, too soon" amid market enthusiasm for its artificial intelligence (AI) initiatives. This comes after Tesla's stock enjoyed an 11-day winning streak, its longest since June 2023. The downgrade led to an 8.4% drop in Tesla shares on Thursday, followed by a slight rebound of 0.3% to $241.67 during Friday's market action.
UBS analyst Joseph Spak, while increasing Tesla's price target from $147 to $197, expressed caution over the company's lofty valuation. "One would need to see an even larger opportunity to justify a buy rating," Spak noted, emphasizing the challenges in Tesla's automotive growth prospects and the extended timeframe for its AI-related ventures. Despite valuing Tesla's AI efforts, including Full Self-Driving (FSD) and the Optimus humanoid robot, at more than $500 billion, Spak pointed out that the payoff is long-term and costly.
Spak also revised his estimates for Tesla's future vehicle deliveries, predicting 3.9 million units by 2030, falling short of the company's goal of 5 million. He valued Tesla's auto segment at $57 per share and its energy business at $18 per share, with FSD and robotaxi combined also around $18 per share.
Comparatively, Morgan Stanley analyst Adam Jonas maintained his Tesla stock price target of $310 but adjusted his valuation of Tesla's auto segment to $56 per share while increasing Tesla Energy's value to $50 per share. Jonas's valuation underscores differing perspectives on Tesla's various business segments and their potential future performance.
Tesla's stock performance has been marked by volatility, with a 44% surge during its recent 11-day win streak. This rally was fueled by optimism over AI advancements and better-than-expected Q2 deliveries, despite overall deliveries being down from the previous year. Tesla shares have now extended significantly from the buy range starting at $191.08, according to MarketSurge chart analysis.
The company's AI and automation projects, including the highly anticipated robotaxi, have been a significant driver of investor interest. However, the postponement of the robotaxi reveal event from August to October has tempered some of the enthusiasm. The delay was attributed to the need for more time to develop additional prototypes.
UBS's downgrade reflects broader market concerns over the sustainability of high valuations for companies tied to AI technology. Tesla, one of the ten most expensive stocks in the S&P 500 Index, has been trading at more than 80 times one-year forward estimated earnings, a multiple that raises questions about the feasibility of its ambitious growth targets.
"If market enthusiasm for AI diminishes, this may impact Tesla's multiple," Spak and his UBS colleagues wrote, highlighting the risks associated with the current market sentiment.
Tesla's stock is now facing a critical period as analysts and investors await its second-quarter earnings report on July 23. The report will be scrutinized for insights into Tesla's performance across its automotive and energy segments, as well as updates on its AI and automation projects.
Despite the downgrade and the stock's recent decline, Tesla remains a significant player in the electric vehicle and renewable energy markets. The company's strategic moves, such as the recent shareholder vote to reincorporate in Texas and the approval of CEO Elon Musk's $56 billion pay package, continue to draw attention.
Looking ahead, Tesla's ability to deliver on its ambitious projects while managing market expectations will be crucial. The interplay between its automotive business, AI initiatives, and energy solutions will determine its trajectory in an increasingly competitive landscape.
