As the United States is about to embark on the "Trump 2.0" era, the "big spender" Musk and his subsidiary Tesla, who played a key role in his campaign, have recently gained a lot of attention. Since Trump's victory earlier this month, Tesla's stock price has surged by about 40%, reaching a two-year high.
However, UBS analysts do not seem to believe that Tesla's recent upward trend can continue. The bank stated on Monday that Tesla's stock price may experience a double-digit correction as the company's fundamentals do not support its surge since the election.
In a recently released report, the bank maintained a "sell" rating on Tesla stock and set a target price of $226 per share. Although this price is slightly higher than the bank's previously set target price of $197, it still means that Tesla will have about 33% downside potential compared to the current stock price.
Trump 2.0 may not necessarily be advantageous
Since Trump's victory, investors have been optimistic that Musk's relationship with the elected president will benefit Tesla. For example, Musk supports ending the tax credit for electric vehicles, which some analysts believe will have a greater impact on Tesla's competitors.
In addition, investors also believe that relaxing regulation in the field of artificial intelligence and the potential disappearance of investigations into Tesla's fully autonomous driving software are beneficial developments for the company.
But UBS said that these ideas of investors may be wrong. For example, canceling the tax credit for electric vehicles may not be entirely beneficial for Tesla, as it could prompt the company to resume price reductions on some models.
Fundamentals are not supported
At the same time, UBS warns that the above optimism is not supported by Tesla's business fundamentals, and the company's growth trajectory seems slower than the current stock price suggests.
Therefore, the rise in Tesla's stock price is mainly driven by animal spirits/power (a situation that has occurred multiple times in Tesla's history). We urge investors to consider what they need to believe in to increase their holdings of Tesla stock at the current level, "the report said.
UBS analysts further explained that Tesla's valuation received a significant boost after the election, returning to a valuation level of $1 trillion. This means that the company will grow rapidly and deliver 15.5 million cars annually by 2030, which UBS estimates is more than three times Wall Street's projected 4.8 million cars delivered that year.
Meanwhile, by 2030, Tesla's energy business will need to store 780 gigawatt hours of energy, more than five times Wall Street's estimate of 134 gigawatt hours that year. In addition, Tesla's autonomous taxi business also needs to add approximately $300 billion in value.
Overvaluation
UBS also pointed out in this report that Tesla's stock price has issued warning signals, indicating that its valuation may be approaching recent highs. Currently, Tesla's automotive business only accounts for 12% of its total valuation.
According to the research of the bank, taking history as a lesson, when Tesla's automotive business is below 17% of its total market value, its stock price often "enters a downward channel".
The first two times this proportion was only around 10%, and the correction rates we saw were 30% and 70%, respectively, "the report said.