UBS Downgrades Tesla to Sell; Analyst Says Valuation Premium Is ‘Too Large’

Tesla (TSLA) stock surged on Friday despite a prominent analyst rating the stock a sell — with valuation being the main culprit.

Tesla shares, which fell 8% yesterday after reports the electric carmaker will delay the Aug. 8 launch of a robotaxi, are still roughly flat for the year despite a massive selloff early in the year. It’s Tesla’s sharp rise — nearly 30% in the past month — that worries UBS’s Joseph Spak.

“Tesla has always traded at a premium to other future growth initiatives. However, at current levels, we believe the unquantifiable premium is too large,” Spak wrote in a note to clients. “Given the lack of visibility and the risk that these growth opportunities will materialize over a longer time horizon (or not at all), we rate the stock a Sell.”

Spak acknowledges that Tesla is more than just a car company, a claim that CEO Elon Musk has been making for some time. Musk claims that Tesla is an AI, robotics and self-driving company first, and an automaker second. Spak also praised Tesla for “positive developments” in other areas such as its energy business and full self-driving software. But again, he said that evaluating those businesses and their long-term potential is difficult.

A SPAC valuation analysis found that at current levels, the market values ​​Tesla’s core automotive business at around $60-90 per share given its current sales trends, with the “other” businesses, such as energy, robotics, autonomous driving, etc., making up the rest at around $175 per share.

UBS’ analysis concluded that those other companies are worth about $93 in their view, meaning there is still a 60% premium attached to those companies, which is a bridge too far for UBS.

Hence the sell rating on Tesla and the $197 target price, which the UBS team believes accurately values ​​Tesla, its core automotive business, and its other endeavors.

Spak acknowledges that the bank could be proven wrong. Spak noted that Tesla shares have traditionally traded on momentum rather than fundamentals, and that trend could continue.

One wild card worth mentioning is Tesla’s planned Robotaxi Day. Although reports suggest it could be pushed back to October, Spak believes market sentiment is more negative than positive ahead of the event, and there could be a “real positive surprise” – meaning the product or its functionality could be more advanced than initially anticipated.

While the UBS team believes Tesla is making good progress on robotaxi, it believes the challenges are still very large and the return is far from certain.

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“We believe that robotaxis are a challenging technical endeavor, and the business model may also face regulatory hurdles as well as questions about consumer adoption. Therefore, we believe that meaningful robotaxis operations in the United States are a long way off (not this decade).”

Finally, Spak said the new, cheaper car — which Tesla has promised to unveil soon — will be more important than Tesla’s robots, and could make the company revamp Tesla’s sales model in the long run.

Spac and UBS estimate that the market for standard or compact cars is about 1 million vehicles per year in the United States. Given Tesla’s historical share of the midsize EV market of about 40% to 50% with the Model 3 and Model Y, the chance of selling 450,000 compact EVs per year is within the realm of possibility.

According to Bloomberg, there are 27 analysts rating Tesla shares as a buy or equivalent, with 19 analysts rating it as a hold and 14 analysts, including UBS, rating it as a sell.

Pras Subramanian is a Yahoo Finance reporter covering the auto industry. You can follow him on Twitter and on Instagram.

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