Looking through Q2, Tesla's future is brighter than ever...
UBS raised Tesla shares to Buy (from Neutral) and confirmed its $1,100 price target. Although the manufacturer's shares have lost about 35% in value since the beginning of the year, the firm believes that the operating outlook is better than ever before, thanks to several important aspects: record-high order backlog & two new gigafactories ramping up;
margin momentum: after the Q2 dip, auto gross margin should structurally exceed 30%, driven by pricing and product & process innovation,
a structural competitive edge in key supply chains, resulting in superior growth and profitability.
While UBS cut its 2022 EPS by -12% due to the Shanghai lockdown, the firm is raising its EPS by 40% over the next three years. As a result, EPS is $28 EPS (diluted) 2025E, to be achieved mostly with already known products and production facilities.
...with a structural competitive advantage in mission-critical areas
UBS expects Tesla's vertical integration in the semiconductors, software, and battery areas to result in superior absolute growth and profitability in the years ahead. Integration represents a strong competitive advantage in the face of structurally tight supply chains. Batteries are the next bottleneck in the industry, according to the firm. Tesla is able to outperform the competition thanks to a combination of its own cell capacity, its lead over global competitors in the use of LFP cells, and its high share of direct-sourced battery products, primarily lithium.
“With a stable dominant global BEV market share of ~20%, Tesla we believe is best positioned to become one of the top-3 global car makers by 2030. Latest headlines about a 10% salaried staff reduction don't change this long-term outlook, in our view.”
Share price drivers: Innovation pipeline, ramp-up & maybe some surprises
According to UBS, the path of catalysts is as follows:
- Shanghai production back to normal (June);
- sequentially weaker Q2 results (July, well flagged);
- another AI day possibly with news about FSD and the humanoid robot (August);
- steepening Berlin & Austin ramp-up curve (H2/22);
- auto gross margin sustainably exceeding 30% (Q3 or Q4 results),
- Cybertruck launch (2023).
“Besides, some potentially share-price affecting headlines outside Tesla's operational hemisphere (Elon Musk's TWTR deal etc).”
Valuation: Attractive entry point for a solid high—growth business, $1,100 PT
UBS' updated DCF model delivers an unchanged rounded $1,100 PT. On a PE basis, “TSLA is now trading close to historical lows on a 2y fwd basis, despite the unimpaired growth outlook.” According to the above-consensus EPS 2025E (diluted), Tesla is currently trading at 27x PE, after which significant upside remains (AV, software), the form wrote.
© 2022, Eva Fox | Tesmanian. All rights reserved.
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About the Author
Eva Fox joined Tesmanian in 2019 to cover breaking news as an automotive journalist. The main topics that she covers are clean energy and electric vehicles. As a journalist, Eva is specialized in Tesla and topics related to the work and development of the company.