UBS raises valuation risk for Tesla, signaling "red light": Stock price "soars" due to market sentiment rather than fundamentals

According to the Zhitong Finance APP, UBS analysts pointed out that the recent surge in Tesla's (TSLA.US) stock price is primarily driven by market sentiment rather than fundamental factors. Analysts emphasized that the valuation of Tesla's automotive business now accounts for a lower proportion of its total market value than the recent average, a trend that has only occurred twice in the past four years, each leading to significant stock price corrections of 30% and over 70%.

Currently, Tesla's expected price-to-earnings ratio has reached 100 times, significantly higher than the average level of the past two years. This indicates that investors need strong conviction to continue increasing their holdings in the stock.

Joseph Tsai of UBS noted that since the election, Tesla's stock price has surged by about 40%, with its market value increasing by over $350 billion, reaching a peak market value of $1.1 trillion. However, he warned that the recent rise in Tesla's stock price is more driven by sentiment, specifically optimism regarding changes in U.S. government policies, rather than improvements in the company's fundamentals.

Tsai wrote, "The rise in Tesla's stock price is primarily driven by animal spirits/momentum (a situation that has occurred multiple times in Tesla's history)."

The report indicates that the market now views Tesla as an artificial intelligence company rather than a traditional electric vehicle manufacturer. The valuation of its automotive and energy businesses is about $52 per share, while Tesla's other businesses, including artificial intelligence, robot taxis, and Optimus, have a total valuation of $1 trillion.

Currently, the automotive business accounts for only 12% of Tesla's total market value, having once dropped to 10%. Historically, when this ratio reaches around 17%, the recent average level, Tesla's stock price tends to enter a "downward channel."

Due to Tesla's high valuation, it remains uncertain whether the automotive business can achieve the expected profits. The report noted that since 2022, Tesla's 12-month expected price-to-earnings ratio has fluctuated between 20 and 60 times, but now exceeds 100 times.

UBS emphasized that investors need extraordinary confidence to increase their holdings at current price levels, such as believing in Tesla's ambitious goals, including delivering 15.5 million vehicles by 2030 and deploying 780 gigawatt-hours of energy storage, which far exceed current market expectations.

Policy Impact Uncertain

Tsai stated that while some policy proposals from elected President Donald Trump may benefit Tesla, there are also negative policy factors that could cause greater harm to the fundamentals than the theoretical benefits brought by the stock price increase.

After Trump won the election, investors pushed Tesla's stock price to a multi-year high. This was mainly due to CEO Elon Musk's strong support for Trump, who informally placed Musk in his inner circle, allowing him to participate in policy meetings and appointing him to manage a government efficiency committee.

Trump also indicated that his views on electric vehicles have improved due to Musk's presence, although reports from the transition team suggested that federal electric vehicle tax credits might be put on hold.

While the elimination of tax credits may harm Tesla's competitors more than Tesla itself, the calculations are not that simple. "The removal of consumer tax credits is not absolutely favorable for the demand for electric vehicles (and TSLA) in the U.S." Tesla may launch some new models or update products, which could be helpful. However, we have already seen that pricing actions (excluding tax credits) have only stabilized demand. Therefore, if credit is canceled, further pricing actions may be needed.

Another positive outcome of Trump's victory for Tesla is a more favorable regulatory environment, especially for Tesla's autonomous taxi service.

Spark wrote that while there is a view that simplifying regulatory "barriers" is beneficial for Tesla's autonomous taxi service, in fact, there are no burdensome federal autonomous vehicle regulations that need to be "relaxed," as the bigger issues are being addressed on a state-by-state basis.

But in fact, the greater challenge may be the technology itself. Spark wrote, "Regulatory changes will not immediately solve the technical challenges of unsupervised (fully autonomous) driving, nor will they change the timeline for solving these issues. We still believe that FSD is improving, but the product is not yet ready for large-scale deployment of autonomous taxis."