Investors have long debated whether Tesla (TSLA -0.23%) should be considered an auto stock or a tech stock. While Tesla's primary products are electric vehicles (EVs), many aspects of its business -- like self-driving vehicles and connectivity subscriptions -- give it a tech flavor. Plus, if you look at Tesla's margins, they don't look like a traditional automaker's at all.

However, there has been a shift in one of these factors recently, and it could signal Tesla's shift to one side of the debate.

Tesla's margin advantage is slipping

Over the past few years, Tesla's margins have grown to levels that most legacy automakers (except ultra-premium ones like Ferrari) could only dream of.

TSLA Gross Profit Margin Chart

TSLA gross profit margin data by YCharts.

However, that gross margin advantage is starting to erode. Tesla has been involved in a pricing war in the EV market now that legacy automakers are beginning to mass-produce EVs. In fact, it recently enacted its sixth price cut in 2023.

The pricing war factored into Tesla missing its own projections for gross margins in the first quarter. In Tesla's Q4 conference call, CFO Zach Kirkhorn guided for at least a 20% automotive margin. However, Tesla only posted an 18% automotive and 19% total gross margin in Q1, which disappointed analysts who were expecting at least 21% overall.

Another factor in this pricing war is the tax credit the U.S. government started at the beginning of 2023. Tesla's cheapest model, the standard-range rear-wheel-drive Model 3, now costs under $40,000. But because Tesla doesn't meet the tax credit's battery sourcing requirements, consumers only get half the $7,500 credit. The Chevy Bolt EV, meanwhile, is eligible for the same credit and starts at a much lower price than the Tesla Model 3.

As Tesla loses its pricing power in EVs, its gross margins will move closer toward the mean. But it will likely maintain some advantage due to not using a dealer network and avoiding other costs that legacy automakers have.

Tech stocks notably have much greater margins than their manufacturing peers, and with Tesla beginning to lose this advantage, it makes the stock look more like an automaker. But it still displays some aspects of a tech stock, too.

Tesla's AI use gives it a tech stock feel

Tesla heavily invests in artificial intelligence (AI) in a way few others can. Its engineers have created proprietary chips to aid in training its AI models and powering full self-driving (FSD) capabilities in its vehicles. 

And its neural network gives Tesla immense information to train its AI models. Its vehicles take in all the information they see when driven, so they can feed it into the company's AI system to train it. That way, a vehicle can react to all situations it might see on the road because the network has likely already experienced them.

There is one aspect where Tesla is absolutely considered a tech stock: its valuation.

With the stock trading at an expensive (even for a tech stock) 47 times earnings, it's far above other automakers like Ford (5.2) and General Motors (5.1). Even when Tesla's margin advantages are stripped away and the price-to-sales ratio is analyzed, Tesla has a tech stock valuation.

Company Price-to-Sales Ratio
Tesla 6.5
Ford 0.3
General Motors 0.3
Toyota Motor

Data source: YCharts.

So what should investors do? Tesla's margins are moving toward those of traditional automakers, yet its valuation is closer to a tech stock. That doesn't seem like a great combination and could lead to some valuation downside. However, Tesla is still growing quickly compared to its peers, with its automotive revenue rising 18% in the first quarter.

I don't think owning the stock is a bad idea, as long as investors ensure that Tesla isn't an outsize position in a portfolio, since the stock has a lot of downside risk if the company continues to cut prices to stay competitive. But with its AI technology and FSD potential, the tech-stock upside remains.