UBS is bearish on Tesla: slashing the target price by 26% to $165, the next wave of growth is expected in 2026.

On March 13, UBS Group AG released its latest report, stating that due to the slowdown in demand for electric vehicles in Europe and the United States, the delayed launch of Model 2, and Tesla's production slowdown due to power outages, Tesla's electric vehicle deliveries, earnings per share, and gross margin are expected to be lower than market expectations by 2026. Therefore, UBS Group AG has lowered Tesla's target stock price from $225 to $165.

However, to achieve accelerated growth, Tesla needs to introduce a Model 2 model priced around $25,000. But this model faces pressure in the low-end electric vehicle market dominated by "rolling out to the sky." UBS Group AG predicts that the sales of Model 2 will be very limited in 2025, and it will not be until 2026 that the sales of Model 2 will significantly increase, becoming an important source of revenue for the company.

Therefore, starting in 2026, Tesla's next wave of growth will be driven by Model 2. In addition, the potential value of AI and robotics projects and Tesla's compensation plan can boost Tesla's valuation.

Tesla's performance will be below market expectations by 2026

UBS Group AG believes that due to the slowdown in demand in the European and American markets, Tesla's production slowdown due to power outages, and the delayed launch of Model 2, Tesla's electric vehicle deliveries, earnings per share, and gross margin will be below market expectations by 2026.

(1) Electric vehicle deliveries:

Q1 2024: Tesla's electric vehicle delivery forecast for Q1 has been revised down from 466,000 to 432,000 units, a decrease of 7.8%, about 10% lower than the market's expected 477,000 units.

Full year 2024: The delivery forecast has been revised down from 2.02 million to 1.96 million units, about 5% lower than the market's expected 2.06 million units.

2025 to 2027: Tesla's electric vehicle delivery forecasts for 2025/2026/2027 have been adjusted from the previous 2.6/3.2/4 million units to around 2.2/3/3.9 million units. Compared to market expectations, the adjustments are a decrease of 8%, an increase of 4%, and an increase of 9%, respectively.

UBS Group AG's delivery forecast is below market expectations before 2026.

(2) Earnings per share (EPS):

Q1 2024: The EPS forecast has been revised down from $0.64 to $0.43, a decrease of 32%, below market expectations.

• Full Year 2024: The EPS forecast for 2024 has been revised down from $2.92 to $2.32, a decrease of 16%, falling below market expectations.

• Full Year 2025: The earnings per share forecast for 2025 has been lowered by 27% to $3.30, approximately 16% lower than the market expectation of $3.94.

• UBS Group AG is more cautious about Tesla's earnings per share.

• Gross Margin:

  • Q1 2024: UBS Group AG has revised down the forecast for the car gross margin excluding tax credits to 13.9%.

  • Full Year 2024: UBS Group AG has lowered the gross margin forecast to 15.2%, below the market expectation of 16.8%.

UBS Group AG stated that there are four main reasons for the forecast adjustments:

1. Slowing demand for electric vehicles in the European and American markets will intensify industry competition. With the global slowdown in electric vehicle growth, competition in the automotive industry is increasing. Major car manufacturers are vying for market share, even industry leader Tesla is forced to adopt price reduction strategies.

2. Tesla's production in Europe and the US has slowed down due to power outages.

3. The launch of Model 2 will be delayed. In order to compete better with affordable models and maintain its leading position in the global electric vehicle market, Tesla has been believed to need a cheaper car in recent years to attract more customers in the fiercely competitive electric vehicle market.

4. Tesla is trying a new production method that may help reduce production costs. However, as this is a new and unverified process, there may be some initial challenges or issues such as low production efficiency, quality control problems, etc. These challenges may affect production speed and costs until the process is optimized and improved. In 2026, Tesla's next wave of growth will be driven by Model 2

UBS Group AG pointed out that Tesla's growth momentum will come from the delivery volume of Model 2 starting in 2026. In addition, the potential value of AI and robotics projects and Tesla's compensation plan can boost Tesla's valuation.

In Europe, Model 2 sales may perform well, but the electric vehicle market is now more competitive compared to when Model 3 first entered the European market. In the US, Model 2 faces less competition, but the opportunities in this segment market may not be as significant as those for Model Y. Analysts are optimistic about the prospects in the Southeast Asian market but did not provide further details.

At the same time, UBS Group AG stated that Tesla's profit margin growth may depend on the sales of its Full Self-Driving (FSD) software, which is currently mainly sold in the US market. To increase FSD sales, especially on the lower-priced Model 2, Tesla needs to lower the price of FSD.

Furthermore, Tesla is investing in the development of AI and robotics projects, and the potential value of this project can help boost Tesla's valuation.

Moreover, if Tesla's compensation plan (i.e., the structure of compensation as the company's CEO) is finalized or optimized, the market believes that this compensation plan can motivate Tesla to better drive the company's development, which may increase investor confidence and drive stock prices up.

Despite these positive factors, UBS Group AG analysts found through discussions with buyers (investors) that the market sentiment towards Tesla is currently very low.

Looking ahead, although UBS Group AG is cautious about Tesla's short-term performance, they maintain a neutral stance. The reason is that while it is difficult to see catalysts for short-term improvement in electric vehicle sentiment, if sentiment does improve, investors may be inclined to buy Tesla stock as Tesla is one of the leaders in the electric vehicle industry.

UBS Group AG analysts have lowered Tesla's target price from $225 to $165 and provided a reasonable P/E ratio of 50.