Interactive Investor

Tesla stock crash is opportunity for electric vehicle bulls

9th June 2022 13:21

Graeme Evans from interactive investor

Shares are down around 40% in 2022 so far, but it’s not all bad news and Tesla shares look cheap, according to these experts who believe the company will return to former glories.

A Tesla (NASDAQ:TSLA) “buy” recommendation today claimed the outlook for the Elon Musk-run business is “brighter than ever” after backing shares to reverse recent heavy falls.

In a note headed “Time to be bold”, UBS said the electric car maker was at an “attractive entry point” after shares fell from last November’s high of $1,229 to as low as $628 last month.

The City bank today switched its rating from “neutral” to “buy” and reiterated a price target of $1,100, a level that would return Tesla to the brink of trillion dollar valuation status.

Its analysts point to three factors for thinking that Tesla’s operational outlook beyond the current quarter is “stronger than ever before”.

The first is a record-high order backlog and the potential impact of ramping up of two new gigafactories in Berlin and Austin, Texas.

They also expect gross margin to structurally exceed 30%, driven by pricing and product and process innovation. The third factor is the company’s competitive edge in key supply chains, resulting in superior growth and profitability.

While UBS has cut its 2022 earnings forecast by 12% to account for the recent Shanghai lockdown, it has raised estimates for the following three years by up to 40%.

This results in $28 earnings per share (EPS) by 2025, a significant 50% ahead of consensus, and meaning that Tesla is trading on 27 times earnings with significant growth potential left in areas such as autonomous vehicles and software developments.

The shares have fallen almost 40% this year, a reversal reflecting a wider flight from high-growth technology stocks in the face of rising interest rates and delivery disruption at Tesla’s Shanghai operation.

Investors have also reacted to uncertainty triggered by Musk’s pursuit of Twitter (NYSE:TWTR) which began in early April with a 9% stake and then became a full $44 billion takeover offer.

The stock also dipped 8% on Friday after Musk reportedly told Tesla staff that he had a "super bad feeling" about the economy and that the company should cut about 10% of jobs. However, Musk clarified over the weekend that headcount should still increase.

Morgan Stanley, which is a long-time Tesla supporter with a current price target of $1,300, said last week that it was still possible to be “a long-term electric vehicle bull” while revising down the adoption curve through the middle of the decade.

It said demand for Tesla vehicles exceeded its capacity to produce, but that this did not mean the company did not have to control costs.

Tesla currently boasts a 20% share of the global market for battery-electric vehicles. It differs from its competitors by having a high degree of vertical integration in critical areas, such as semiconductors, batteries and raw materials as well as software, especially self driving.

In April’s first-quarter results, Tesla highlighted a multi-year target for 50% average annual growth in vehicle deliveries but said factors such as supply chain stability were key.

It added: “Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through the rest of 2022.”

UBS estimates about 60,000 units were lost due to the Shanghai lockdown, but it still expects Tesla to reach 1.4 million deliveries in 2022 amid a 12% EPS cut to its previous forecasts.

It said: “With that, the 50% annual growth target would still be achievable. Giga Shanghai is on a steep re-ramp curve and demand remains solid with order backlog at record-high levels.”

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