UBS downgrades Tesla ahead of its big Cybertruck production ramp - and poses 3 pivotal questions that will define the company's future

• UBS downgraded Tesla to "Neutral" on Monday amid the stock's scorching year-to-date 112% rally.

• While UBS still sees a long-term opportunity in Tesla, its stock is priced for near-perfection.

• UBS posed three pivotal questions Tesla investors should be asking. Here are the answers.

UBS downgraded Tesla to "Neutral" on Monday and argued that a lot of good news is already priced into the stock based on its near-$1 trillion valuation and scorching 112% year-to-date rally.

"We downgrade to Neutral because we think the recent strong share performance fully reflects the strong demand response seen after price cuts, as well as a solid executive in 2024," UBS said.

That comes about a week after the company released its second-quarter earnings results. While Tesla beat profit and revenue estimates, its slide in automotive gross margins helped spark a more than 10% sell-off in the stock.

Still, UBS holds a bullish long-term view on Tesla and raised its 12-month price target to $270 from $220, reflecting potential upside of about 3% from current levels.

"We continue to see Tesla globally leading the race to affordable electric and autonomous mobility, but on a one-year view, risk/reward looks balanced," UBS said.

And there are plenty of risks for Tesla as it increases spending to ramp up the production of the Cybertruck in 2024, as well as continuing to develop an alternative to Nvidia chips via its Dojo supercomputer.

For Tesla to unlock more value for its investors, it needs to unlock more profits, and that's unlikely to happen until the company makes progress on its autonomous driving technology, UBS said.

UBS posed three pivotal questions Tesla investors need to ask. Here are the answers, according to the note.

1. Can Tesla Deliver on its 50% growth target?

"Likely not for 2023, uncertain for 2024, likely yes for 2025. Tesla should meet the 1.8 million delivery target for 2023, but achieving 50% growth in 2024 would require a perfect ramp of Cybertruck. From 2025 onwards, the new affordable platform will be a game-changer for Tesla and the industry with the first truly global $25k mass-market EV, and we have little doubt about Tesla's ability to be the most profitable OEM in this segment."

2. Will Tesla keep its lead over the competition?

"With the exception of BYD, we don't see any other OEM close to Tesla's cost position and vertical integration. With that, Tesla can not only keep gaining share from the internal combustion engine segment but also beat competition on pricing while still generating positive free cash flow covering all growth capex. Our long-term base case is that Tesla will be one of the world's largest OEMs by 2030 (9.6m units in 2030, same size as Toyota today), with superior margins."

3. Will Tesla reach full autonomous driving over the next 12 months?

"Likely not. While we consider Tesla best positioned to leverage AI competency with own purpose built supercomputer capacity (Dojo), we think full self driving iterations continue for several years until full autonomy can be reached, first in North America. Only then the technology becomes a game changer for Tesla's financials."

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