UBS sees 20% downside risk in Tesla stock as a lot of AI optionality is priced in

UBS analysts reiterated their Sell rating on TSLA, citing significant downside risk due to overvaluation and challenges in the automotive business.

They believe Tesla (NASDAQ:TSLA)'s stock, currently trading at over 100 times its run-rate EPS of approximately $2.25, has a lot of AI optionality priced in, leading to an inflated valuation.

"TSLA 2Q24 results showed the stress on the automotive business, just to keep vehicle deliveries ~1.78mm annualized units (which would be -2% y/y)," UBS notes.

The bank says the aggressive pricing and promotional strategies to stimulate demand have caused Tesla's auto gross margin, excluding credits, to drop to 14.6%, the lowest since 1Q19.

Adjusting for higher-than-normal credits and restructuring charges, UBS estimates Tesla's run-rate EPS to be around $0.56, which still includes a strong but potentially volatile quarter for its Energy business.

UBS is skeptical about the near-term drivers for Tesla's earnings. While the introduction of a new lower-cost model and increased Full Self-Driving (FSD) take rates could help, the analysts argue that even an improvement of $1 per share in earnings would still leave the stock trading at over 75 times its price-to-earnings ratio.

The analysts assert that Tesla's current stock price heavily relies on future AI initiatives such as robo-taxis and Optimus humanoid robots.

UBS notes that Elon Musk recently repeated a prior sentiment, stating: "The value of Tesla overwhelmingly is autonomy." However, UBS points out the uncertainty in the timeframe and probability of success for these ventures.

They estimate only ~$74 per share is attributed to Tesla's core automotive and energy businesses, implying a substantial premium for these speculative projects.

UBS concludes that Tesla's stock faces more downside risk if confidence in these AI initiatives wavers. They caution that upcoming events like Robo-taxi day on October 10 could trigger a "sell-the-news" reaction, emphasizing the overvaluation of the stock based on uncertain future opportunities.