RBC Upgrades Tesla: EV Competition 'Doesn't Overly Concern Us'

Tesla Inc TSLA shares dropped 3.3% on Monday despite the company landing an upgrade on Wall Street.

The Analyst: RBC Capital Markets analyst Joseph Spak upgraded Tesla from Sector Perform to Outperform and cut his price target from $1,175 to $1,100.

Related Link: Ark Innovation Fund Rallies: Should Investors Still Avoid ARKK 'At All Costs'?

The Thesis: In the upgrade note, Spak said Tesla has a more favorable near-term set-up and its vertical integration and supply chain will provide a competitive advantage for the company.

"TSLA earnings and cash generation over the coming years, in addition to their ability to use their stock as currency, can help them build out and secure materials giving them a strong competitive advantage," Spak said.

Spak is calling for Tesla to report 249,000 vehicle deliveries in the second quarter, below consensus analyst estimates of 279,000 units. He is also projecting auto gross margins of 28.6% in the second quarter, down from 30% in the first quarter.

However, Spak is anticipating Tesla's business will significantly improve in the second half of the year. He's calling for 396,000 deliveries in the third quarter, above the 378,000 units Wall Street is expecting. In addition, he said auto gross margins will climb above 30% in the second half of the year as Tesla's Shanghai factory gets back to full production and activity ramps at its Texas and Berlin plants.

Spak said Tesla will likely lose market share as competition ramps in 2022 and beyond, but he is not concerned about the share losses given Tesla's solid demand and pricing gains.

Benzinga's Take: Tesla has certainly been one of the most impressive growth stories in the market in the past decade, but critics always focus on the stock's valuation. Even after a 44.6% year-to-date pullback, Tesla's 43.6% forward earnings multiple and 11.2 price-to-sales ratio aren't necessarily attractive to value investors.

Price Action: Shares of Tesla were trading 6.56% lower at $650.99 on Monday, according to Benzinga Pro.