"Risen too much, too fast!" UBS downgrades Tesla's rating to sell, citing the valuation of non-automotive businesses being too high

The news that Tesla's RoboTaxi launch has been delayed by two months was followed by a downgrade from "Neutral" to "Sell" by the major Wall Street firm UBS on Friday, July 12th.

UBS analysts, including Joseph Spak, released a report stating that Tesla's stock price has "risen too much, too quickly," making its current valuation increasingly difficult to justify.

The current trading price of the stock is 86 times the one-year forward earnings, lacking visibility, and facing risks of delays or even failure to achieve growth targets.

The institution believes that the high valuation of Tesla's non-core businesses under the drive of artificial intelligence has reached a level that may raise concerns. Based on historical experience, once the proportion of the automotive business in Tesla's stock price falls below 30%, its stock price will enter a downward channel.

UBS also pointed out that Tesla's delay in launching the RobotTaxi implies that the project implementation may be more challenging than expected. Under a pessimistic assumption, the robot taxi business will not bring any value to Tesla.

Beware of Cooling AI Enthusiasm

As one of the top 10 most expensive stocks in the S&P 500 index, Tesla had surged 46% in the past three months before plummeting 8.4% on Thursday, with investors betting that Musk can turn the company into an artificial intelligence giant.

However, UBS noted that investors have been willing to pay a premium for Tesla's new businesses, non-core businesses, and growth plans due to the enthusiasm for artificial intelligence. Once this enthusiasm wanes, it may affect the stock's valuation.

At the current level, we still believe there is over $500 billion in future growth potential (for Tesla's market value). Even if we give it 5 years to achieve this growth, it means its market value will only be $1 trillion in 5 years.

This is just to prove the current level's rationality; to justify a buy rating, we need to see greater opportunities.

Although Tesla has made significant investments in the field of artificial intelligence and its technology is advancing, the high investment costs and potentially slower pace of technological iteration may lead to a longer payback period. If the market's enthusiasm for artificial intelligence diminishes, it may affect Tesla's P/E ratio.

UBS's valuation attribution analysis shows that the market has consistently valued Tesla's core automotive business between $60-90 per share. The average value of non-automotive businesses over the past 2 years has been around $140 per share, and with recent increases, it has now approached $175 per share.

The institution believes that the high valuation of Tesla's non-core businesses has reached a level that may raise concerns. According to historical experience, once the proportion of the automotive business in Tesla's stock price falls below 30%, its stock price will enter a downward channel.

Meanwhile, UBS has raised Tesla's target price from $147 to $197, which is 18% lower than the current stock price; at the same time, the price-to-earnings ratio has been increased from 45 times to 55 times.

According to UBS's estimation, Tesla's automotive business is valued at approximately $57 per share (about 28.9% of the current target price), the energy business with strong recent growth and higher profit margins is valued at around $18 per share, and the fully autonomous driving/robotaxi business could be valued at around $18 per share.

However, the combined value of these businesses is only $93 per share, meaning that about 61% of the current stock price is a premium or investors' valuation of its future opportunities.

Intense Competition in Automotive Business, Rapid Growth in Energy Business

Looking ahead over the next five years, UBS holds a conservative view on Tesla's vehicle deliveries in 2030, expecting deliveries to reach approximately 3.9 million units, which is 19% lower than the market's general expectations.

The institution believes that Tesla's demand in the U.S. market may have already saturated, while facing more intense competition in the European and Chinese markets. Therefore, Tesla needs to introduce new models or update existing ones to stimulate demand, but even so, achieving the market's expectation of over 5 million deliveries remains a challenge.

For Tesla's energy business, UBS sees significant recent growth and higher profit margins for this business.

Despite the possibility of unstable energy storage deployment, considering the vast opportunities in the stationary storage market, it is possible for Tesla's energy business to achieve a compound annual growth rate of around 30% by 2030.

However, this would require more investment in production capacity, and as the business scales up, the growth rate may be affected by the law of large numbers.

What Does the Delay of RoboTaxi Launch Mean?

As for the robotaxi business, UBS points out that Tesla's delay in launching the RobotTaxi implies that the project implementation may be more challenging than expected. UBS believes that it is still too early to achieve meaningful robot taxi operations in the United States, and it may not be realized within this decade.

Although Tesla's end-to-end (Gen AI) approach has brought significant improvements to the FSD product, achieving a solution for robot taxis requires continuous technological advancements and a large amount of data collection. UBS believes that as technology improvements deepen, the pace of improvement may slow down, and costs may increase.

They have adjusted the valuation of the robot taxi business:

The business is valued at approximately $30 billion (per share $9) under basic assumptions, around $100 billion under optimistic assumptions. However, under pessimistic assumptions, the robot taxi business will not bring any value to Tesla.