If you've been keeping up on Tesla (TSLA -0.40%) lately, you've probably only seen negative headlines. With headwinds forming in the electric vehicle (EV) market, multiple rounds of layoffs, and some rumors that it would be scrapping its highly anticipated sub-$25,000 model, Tesla hasn't been able to catch a break.
With the bad news piling on and investors having their fortitude tested, it's worth asking: Is Tesla still a good long-term option?
Image source: Tesla.
Analyzing Tesla's value
Compared to other automakers, Tesla stock is considered expensive and overvalued. We can see this by comparing the P/E ratios of companies.
Today Tesla's P/E ratio is at 42. This is five times more expensive than the second-most-valuable automaker, Toyota, and roughly twice as expensive as China-based fellow EV maker BYD.
TSLA PE Ratio data by YCharts.
Even with its generous margins and the ability to mass-produce EVs efficiently, Tesla's stock isn't worth buying from a pure automotive perspective. However, when viewing Tesla from the context of its future endeavors, its potential begins to shine through and hints that it is currently trading at a discount.
Many consider Tesla the best investment opportunity to gain exposure to the future potential of artificial intelligence (AI), despite the need for further development before the company can benefit from its labor.
The road ahead is why Tesla is undervalued
CEO Elon Musk's goal is to make Tesla the most valuable company in the world one day. And it will do that by making its full self driving software more capable and increasing the capabilities of its humanoid robot Optimus.
On the self-driving side of things, Musk's goal is to eventually launch a robotaxi service. With vehicles that are able to drive themselves, Musk plans to create a one-of-a-kind ride hailing business that could change how we travel. He sees it as an opportunity with "quasi-infinite" demand, and many analysts agree that it will be an inflection point.
It is difficult to quantify the true potential for a technology that doesn't exist anywhere else in the market, but ARK Invest took a stab at it. After running a Monte Carlo simulation, the investment firm found that robotaxis could generate up to $440 billion in revenue, roughly four times greater than total revenue in 2023.
As for Optimus, the potential is still commendable, albeit not quite as significant as robotaxis. Morgan Stanley analysts believe that Optimus could disrupt up to 30% of the global labor market with its ability to perform repetitive and dangerous tasks currently performed by humans. From a revenue perspective, Musk foresees Optimus surpassing its vehicle manufacturing one day.
Optimus is currently already in use at Tesla factories performing basic tasks. But Musk believes it will increase its responsibilities by the end of this year, and will be able to be shipped to consumers and markets by the end of 2025.
The opportunity at hand today
From a pure EV perspective, it might be difficult to justify an investment in Tesla. While it will continue to increase its EV production capabilities in years to come and will benefit from increasing adoption of EVs around the world, the true potential for Tesla is from its AI endeavors.
It might not be wise for risk-averse investors to invest in Tesla as it works through challenges in the short term, but for those with a long-term horizon and an appetite for risk, it could be argued that there are few better options than Tesla.
Beyond Tesla's fundamentals, it's worth remembering the advice given by one of the world's most prominent investors, Warren Buffett. He famously said, "Be greedy when others are fearful, and fearful when others are greedy." With a quick search across the internet, it's clear that there is fear when it comes to investing in Tesla today.
While bad press isn't reason enough to invest in a company, when considering Tesla's history of success, the progress it's made in developing its AI products, and the transformative potential these technologies could have on society, Tesla appears to be a solid long-term option for growth investors.
