Tesla (TSLA.US) ended its 11-day streak of gains, with UBS continuing to downgrade the stock: it had gotten too far ahead of itself.
1min read UBS downgraded Tesla (TSLA.US) to "sell" from "neutral", with a target price of $197, up from $147, still 18% below Friday's closing price. The US electric vehicle maker's shares have "rallied too fast and too far" on optimism about its artificial intelligence (AI) plans, according to the broker, which cited a higher multiple of earnings in adjusting its target price.
“If sentiment around AI were to wane, this could impact Tesla's multiple,” said analysts at UBS, led by Joseph Spak, adding that the downgrade was justified given the lack of visibility and the potential for growth opportunities to materialise (or not) over a longer period of time. The stock trades on a multiple of more than 80 times expected earnings over the next year, they said.
The move by UBS reflects growing concerns about the valuation of companies linked to AI, with the US large-cap tech stocks sold off overnight on Thursday. Tesla's prospects for its electric vehicles are also bleak, with sales and profits both falling.
Tesla is one of the 10 most expensive stocks in the S&P 500, far above other large-cap tech stocks. Its shares have risen 44 per cent since Wednesday, after 11 straight days of gains, as investors bet on Elon Musk turning the company into an AI powerhouse.
“Investors have given Tesla a higher multiple on a series of initiatives based on enthusiasm for AI, but still need to see more to justify the buy rating,” said the UBS analysts.
Tesla's recent rally has been driven by its revenue growth at double-digit rates. In addition to slowing sales and intensifying competition, the company has also stunned investors by pushing back its highly anticipated Autonomy Robot Taxi plan from August to October.
DataTrek Morning Briefing reported that 60 per cent to 90 per cent of the valuation of US large-cap tech stocks is based on future growth expectations, compared with about 55 per cent for the S&P 500. But for Tesla, 91 per cent of its valuation is based on future earnings, according to DataTrek co-founder Nicholas Colas, who called it a "faith stock".