Trump Won't Save Tesla? UBS Warns of 33% Correction Ahead Due to Valuation Stretch and Fundamental Concerns

As the U.S. prepares to enter the Trump 2.0 era, Elon Musk and his company Tesla, which played a key role in Trump's campaign, have seen significant gains. However, UBS analysts just warned Tesla's recent rally was not sustainable. 

The bank stated on Monday that Tesla's stock might see a double-digit correction as the company's fundamentals do not support the post-election surge in its stock price. They maintained a sell rating on the stock, with a target price of $226. Although this target is slightly higher than the previous $197 target, it still implies a potential 33% downside from the current stock price.

Tesla shares dropped nearly 4% on Monday, but the stock has still jumped 40% year-to-date and 60% from the October low, as high expectations persist that Trump will support Tesla during his four-year term.

Trump 2.0 Might Not Be Beneficial

Since Trump's victory, investors have been optimistic that Musk's relationship with the president-elect will benefit Tesla. For example, Musk supports ending electric vehicle tax credits, which some analysts believe would impact Tesla's competitors more significantly.

Additionally, investors believe that relaxed regulations in the AI sector and the potential cessation of investigations into Tesla's full self-driving software would be positive developments for the company.

However, UBS suggests that these investor assumptions might be incorrect. For instance, eliminating EV tax credits might not fully benefit Tesla, as it could prompt the company to resume price cuts on some models.

Fundamentals Do Not Support the Optimism

Meanwhile, UBS warns that the optimistic sentiment is not backed by Tesla's business fundamentals, as the company's growth trajectory appears slower than what the current stock price implies.

The rise in Tesla's stock price is mainly driven by animal spirits/momentum (a phenomenon seen multiple times in Tesla's history). We urge investors to consider what they need to believe to justify holding Tesla stock at current levels, the report stated.

UBS analysts further explained that Tesla's valuation received a significant boost post-election, returning to a $1 trillion valuation level. This implies that the company will grow rapidly, delivering 15.5 million vehicles annually by 2030, which is more than three times Wall Street's estimate of 4.8 million vehicles.

Additionally, by 2030, Tesla's energy business would need to store 780 gigawatt-hours of energy, five times Wall Street's estimate of 134 gigawatt-hours for that year. Furthermore, Tesla's autonomous taxi business would need to add approximately $300 billion in value.

Overvaluation Concerns

The UBS also highlighted that Tesla's stock price has signaled warning signs, indicating that its valuation might be approaching a recent peak. Currently, Tesla's automotive business accounts for only 12% of its total valuation.

According to UBS research, historically, when Tesla's automotive business falls below 17% of its total market value, its stock price tends to enter a downward trajectory.

The last two times this ratio was around 10%, we saw corrections of 30% and 70%, respectively, the report stated.