With Tesla Inc (NASDAQ:TSLA) having gained over $350 billion in market capitalization since the US election, analysts at UBS urged investors to think hard about whether the company deserved its valuation of almost $1.1 trillion.
The near-40% surge in the shares since the US election, outpacing the broader S&P 500, was mostly down to the classic "animal spirits" of the market, fueled by some views that President-elect Donald Trump's second administration will benefit the company more than rivals.
Trump has proposed removing electric vehicle tax credits, which Musk has suggested will hurt Tesla less than its US competitors.
The regulatory environment is also expected to be more favorable for artificial intelligence ventures, such as Tesla's robotaxi business, and could see Autopilot/FSD investigations go away.
"However, the removal of consumer tax credits is not an absolute positive for US EV (and TSLA) demand," said UBS, with price cuts potentially needed to help stabilize demand.
What's more, there has been evidence of demand levers being pulled, competition in China remains high with more competitive models coming, and European rivals are also likely have to push more EVs in 2025.
It is possible a "significant portion" of Tesla's regulatory credits, which is forecast to represent around $3 billion of free profit in 2024, will be viewed as "at risk", UBS said.
On the robotaxi front, the view that an easier regulatory hurdle is positive for Musk's ambitions "may end up being true" but the analysts do not believe there is much in the way of onerous federal AV regulations that could be relaxed, "and there could be a battle between states (that regulate drivers) and the Federal government (that regulates tech)".
"Further, a change in regulation doesn't immediately solve, nor change the timeline to solve, the technological challenge of unsupervised FSD.
"We continue to believe that FSD is improving, but the product is not ready for wide scale robotaxi deployment. Thus, the rise in Tesla stock is mostly driven by animal spirits/momentum (which has happened multiple times in TSLA’s history)."
The UBS analyst said they "urge investors to think about what one needs to believe to add to TSLA positions at current levels".
Valuing Tesla's automotive and energy businesses at around $52 a share out of the last close price of $338.59, that puts everything else (AI, robotaxi, Optimus, etc) at a market value of around $1 trillion.
"We understand that the market increasingly views TSLA as an AI play, not an EV player, but as Fig.2 shows, when the value you can more tangibly attribute to the auto business hits the recent average (~17%), the stock tends to enter a downward channel."
The value that UBS can currently attribute to automotive out of the total market cap is around 12%, which compares to lows previously seen of circa 10%.
"The prior two times that metric has hit ~10%, we've seen corrections of >30% and >70%."
UBS reiterated its 'Sell' rating but raised its price target to $226 from $197, which is a 57x P/E multiple on the bank's 2026 EPS forecast, though it noted this valuation remains below the current 110x multiple.