UBS Downgrades Tesla Stock Amid Concerns Over AI And Automotive Business

UBS has downgraded Tesla stock (NYSE: TSLA) to a “sell” while raising its target price by $50 to $197. The brokerage is concerned over the deterioration in TSLA’s core automotive business and warns that if enthusiasm towards the company’s artificial intelligence (AI) products wanes, it would be tough to justify its valuations.

“While TSLA is investing heavily in AI and the tech is making progress, investment is costly, pace of improvement may slow and the payoff is long dated,” said UBS analysts led by Joseph Spak in their note.

They added, “If market enthusiasm for AI diminishes, this may impact TSLA’s [price-to-earnings] multiple.”

UBS Downgrades Tesla Stock to a Sell

Notably, UBS’s downgrade comes a day after Bloomberg reported that Tesla could delay its robotaxi unveil and instead of August the event would be held in October. TSLA stock fell 8% yesterday which was preceded by a winning streak of 11 trading days that had helped it recoup its 2024 losses and turn positive for the year.

Tesla has doubled down on AI products and is working on the Optimus humanoid and Dojo supercomputer. Musk is particularly bullish on Tesla’s Optimus humanoid and during the Q1 2024 earnings call he said, it “will be more valuable than everything else combined.” He added, “We do think we will have Optimus in limited production in the natural factory itself, doing useful tasks before the end of this year. And then I think we may be able to sell it externally by the end of next year.” Musk however termed these timelines as “guesses.”

Analysts expect robotaxi to be a significant growth driver for Tesla but that product has missed previous deadlines also as Musk had once touted a million of these by 2020.

While a section of the market is apprehensive about the robotaxi, those bullish on Tesla believe it would be a key driver for the stock. For instance, Wedbush said, “We believe the August 8th robotaxi day will be a key historical moment for the Tesla story that we see as a near-term catalyst.”

Tesla FSD Under a Scanner

Tesla’s full self-driving (FSD) has anyways been under a scanner and unlike what the name suggests it’s not fully autonomous. By Musk’s own admission, its valuation which surpassed $1.2 trillion at the peak is linked to autonomy.

Musk has said multiple times that TSLA will reach full autonomy and during the Q1 earnings call in April he said, “If somebody doesn’t believe Tesla’s going to solve autonomy, I think they should not be an investor in the company.”

Meanwhile, UBS estimates that robotaxis accounts for $18 of Tesla’s stock price with energy business also accounting for the same value. It estimates that $57 of TSLA’s stock price comes from the automotive business which has shown signs of stagnation.

TSLA Reported a YoY Fall in Q2 Deliveries

In Q2, Tesla produced around 410,831 vehicles and delivered 443,956 vehicles. While the company’s deliveries fell 4.8% YoY, they were higher than the 439,000 that analysts expected. Notably, Tesla’s deliveries fell 8% in Q1 also while its revenues fell 9% which was the steepest pace of decline since 2012.

It was after a decade that TSLA’s deliveries fell YoY for two consecutive quarters. In order to boost its deliveries, Tesla has started an EV price war and has lowered car prices multiple times. Due to the frequent price cuts, its operating margins – which were once the envy of the industry – are down to mid-single digits.

The price war is also taking a toll on the earnings of startup EV companies most of which are anyways posting losses. Even legacy automakers are witnessing widening losses in their EV business as they have had to cut prices to keep the models competitive.

UBS on TSLA’s Valuation

Meanwhile, in its note, UBS said that the identifiable value in Tesla’s stock comes to around $93 which is 61% of its stock price. The note warned, “We believe that unidentifiable premium is too significant.” It added, “Given the lack of visibility and the risk that these growth opportunities materialize on a longer time horizon (or don’t
materialize at all), we rate the stock Sell.”

Meanwhile, Tesla is facing competition from other brands also and Cox Automotive estimates that its share of the US EV market fell below 50% in Q2.

“Despite Tesla’s declining sales, with its EV sales share now below 50% for the first time, the overall competitive landscape for electric vehicles is intensifying,” said Stephanie Valdez Streaty, industry insights director at Cox Automotive, in the report.

With Tesla’s deliveries now reaching a critical mass of nearly 2 million annually and other companies launching competing models, the company is facing troubles growing its deliveries by 50% annually as Musk once touted.

Meanwhile, after the crash yesterday, TSLA stock is in the green today despite the bearish UBS note.