Product aging, intense competition, brand damage! HSBC significantly lowers Tesla's profit forecast for the next three years

HSBC warns that Tesla's earnings will continue to be disappointing, facing three severe challenges in scaling Robotaxi.

According to the Chasing Wind Trading Desk, HSBC maintained its "reduce" rating on Tesla in its latest report, with a target price of $120, implying a 63% downside from the current stock price.

Based on actual sales data from April and May, as well as historical seasonal factors from June, HSBC predicts that second-quarter deliveries will remain flat quarter-on-quarter, which is 15% lower than market expectations, with an 8% downside risk to operating revenue.

HSBC analyst Michael Tyndall pointed out that Tesla's weak sales are due to product aging, intensified competition, and concerns about brand image, with the new Model Y facelift having a limited effect on boosting sales.

HSBC also significantly lowered its delivery and profit expectations for 2025-2027, anticipating that the AI computing costs for Robotaxi will rise but will struggle to contribute to revenue and profits in the short term. HSBC believes that without clear signs of launching a more affordable model priced below $25,000, mid-term sales growth will remain moderate.

Dim Growth Prospects, Significant Downgrade of 2025-2027 Profit Expectations

Based on actual delivery data from April and May and historical seasonal patterns for June, HSBC expects Tesla's Q2 deliveries to remain flat quarter-on-quarter. This forecast is 15% lower than the current market consensus, primarily due to structural issues such as product mix aging, intensified competition, and concerns about brand image.

Although the facelifted Model Y has been launched, it seems to have failed to effectively halt the declining sales trend. HSBC expects Q2 production to be better than Q1, with automotive gross margins likely to improve quarter-on-quarter, but the forecasts for energy storage business are generally in line with market consensus. Due to weak delivery volumes, HSBC expects operating revenue to be 8% lower than consensus, with free cash flow only slightly positive.

HSBC expresses a pessimistic outlook on Tesla's mid-term prospects, lowering its operating profit margin expectations for 2025-2027 by 19-25%. Analysts point out that without launching an entry-level model priced below $25,000, mid-term sales growth is expected to remain moderate.

The new Model Y is expected to support sales and price combinations in Q3 and Q4 to some extent, leading to quarter-on-quarter growth. However, HSBC has lowered its sales forecast by 5-7%, while also believing that costs associated with Robotaxi AI computing may increase in the short term, but will have limited contributions to revenue and profits.

Three Challenges for Robotaxi

HSBC believes that Tesla's Robotaxi business needs to overcome three levels of challenges to achieve scaling:

First, Tesla needs to prove the robustness and reliability of its pure camera solution, while other companies in the industry have opted for a broader sensor combination, and early signs from the Austin pilot are concerning.

Second, for Robotaxi to evolve from a public transport alternative to a more widespread application, consumers ultimately need to abandon the concept of personal vehicle ownership, which is not an easy task.

Finally, Tesla needs to demonstrate that it can achieve profitability through operating the Robotaxi business, which reportedly seems to be a topic of internal discussion within the company According to Waymo's data, the company is still far from profitability, which may explain its $6 billion equity financing in 2024.

Downside potential of up to 63%, maintaining a downgrade rating

HSBC uses a method that weights DCF valuation and peer multiples valuation equally at 50%, maintaining a target price of $120. In the peer multiples valuation, based on a 12-month forward EV/EBITDA multiple of 20.6 times and a price-to-earnings ratio of 33.1 times, the fair value per share is estimated at $60.

The DCF valuation covers six business segments, including automotive, energy storage, fully autonomous driving, Dojo, Optimus, and services, resulting in a fair value per share of $180. The bank applies different beta coefficients for different businesses to reflect the risk levels of each, with a uniform risk premium of 4.25%.

Upside risks include improvements in macro factors such as declining interest rates, significant drops in battery material prices, electric vehicle market growth exceeding expectations, and breakthroughs in fully autonomous driving, Dojo, and Optimus. HSBC expects these technologies to start contributing revenue from 2028