Tesla Downgraded, Here’s Why This Could Be A Good Thing

Key Points

• UBS has downgraded Tesla, following several peers in recent months. 
• It comes after last week’s earnings which showed contracting margins. 
• The long-term potential remains intact, so any selling is a buying opportunity.

It’s happened again. About this time last month, Tesla Inc NASDAQ: TSLA received what was its third rating downgrade in just a few weeks. What we found interesting at the time was that all the analysts putting through the downgrades still felt bullish on Tesla’s longer-term potential.

We called any pullback in shares a buying opportunity, and indeed so, it has turned out to be. Since their low after the Barclays downgrade, Tesla’s shares have gained as much as 25%. 

This week saw another downgrade, this time for the team at UBS, but our stance hasn’t changed. While we feel there is some merit to the cautious stance being taken on by the big names, ultimately, the long-term opportunity remains intact, so any dip on the back of this should be considered a buying opportunity.

Let’s jump in and take a closer look at why that’s the case. 

Strong Headline Numbers

Despite easily beating analyst expectations on the headline numbers in last week’s Q2 report, Tesla’s shares dropped nearly 15% this week as investors digested the full report. The main culprit was the company’s margins, which contracted more than expected even though year-on-year revenue was up 47%.

This was one of the reasons Patrick Hummel and his team moved their rating on Tesla to Neutral from Buy then this week. 

While they remain impressed with the stock’s strong performance in recent months, they also see this being due to price cuts which have now run their course. Indeed, it’s these price cuts from earlier in the year that are starting to squeeze their margins now. Hence the downgrade and cautious stance for now.

Interestingly enough, Hummel made a point to say, “We continue to see Tesla globally leading the race to affordable electric and autonomous mobility,” and while this year’s edge is mostly gone, 2024’s gross margin trend already looks promising. 

So what does that mean for those of us on the sidelines? Well, if you, too, are a believer in Tesla, then any dip from here is only going to make an entry point more attractive. UBS set a fresh price target for Tesla at $270, which is already above where shares were trading on Wednesday evening.

All told, it’s a move that echoes those from last month, where analysts were at the same time extolling Tesla’s longer-term potential while suggesting that there may be better entries around the corner. 

Getting Involved 

If you’re thinking of taking advantage of any dip on the back of this downgrade, there are several reasons to be excited. For one, in last week’s report, the company confirmed a record number of deliveries, a key metric for Tesla, that smashed analyst expectations.

Q2 numbers were up an astounded 83% on the same quarter last year, which propelled the company to record quarterly revenues. Tesla is still Tesla, and it should come as no surprise that even with the recent dip, their stock is up more than 150% on the year. 

And the future remains bright. Dan Ives of Wedbush also recently spoke about margins recovering in 2024 while maintaining his $300 price target. From where shares were trading on Wednesday, that pointed to an upside of about 15%.

Tesla’s competitive first-mover advantage remains unmatched across effectively any industry, and the social shift to electric vehicles is only gathering pace.

There is some merit to the argument that shares are reasonably well valued at current levels, especially if you consider that Tesla’s price-to-earnings (P/E) ratio has doubled since December.

But at 75, it’s still well below the 1,100 P/E ratio it commanded back in 2020. It’s hard to make the argument that Tesla shares are overvalued right now when they’re trading down 40% from all-time highs while turning over record revenue, and so while the current run might be due a breather, any weakness in the coming weeks just means more upside in the longer term.