Tesla (TSLA 2.60%) has divided Wall Street since it went public in 2010. Its CEO, Elon Musk, had grand ambitions and very few believers when he set out to manufacture and sell electric vehicles (EVs) back then, but he has repeatedly proved the doubters wrong.
As a result, Tesla stock has delivered a whopping 15,000%-plus return in the last 14 years. It's a member of the "Magnificent Seven," a prestigious group of the world's largest technology stocks.
That membership is under threat, however, because Tesla stock is trading 58% below its all-time high as Musk and his team grapple with softening demand for EVs and an increasingly competitive environment.
NASDAQ: TSLA
Key Data Points
Wall Street remains split on Tesla's future
Despite all of Tesla's success, Wall Street remains divided on the company's prospects. Its stock trades at $177.46 as of this writing, so keep that in mind when digesting the numbers below.
Ark Investment Management, which is run by technology investor Cathie Wood, thinks Tesla stock could soar 1,027% from here to $2,000 per share. On the flip side, GLJ Research thinks the stock could plunge 87% to just $23.53 per share.
Ark's target is predicated on Tesla becoming a leader in autonomous driving, whereas GLJ simply believes the company's valuation is way too high right now, and it points to a recent decline in EV sales that could be a sign of things to come. So, who's right?
Tesla faces headwinds in its EV business
Tesla is coming off a challenging 2023. Despite meeting its delivery target of 1.8 million vehicles, it had to slash prices by more than 25% (on average) to stoke demand. This year is looking even worse because Musk hasn't even offered a delivery forecast, which leaves analysts to estimate the number could come in as low as 2.2 million.
That would equal growth of just 22% year over year, which is far below Musk's long-term target of 50% annually. But deliveries shrank 9% during the first quarter, so Tesla is off to a rough start.
Tough economic conditions have forced consumers to cut back on spending, and high interest rates have made debt very expensive for those who want to finance a new car. That's hurting demand for EVs in general, which prompted manufacturers like Ford and General Motors to cut billions of dollars of investment from their future production plans.
Despite those legacy automakers pulling back, Tesla still faces growing competition from other EV manufacturers. Those based overseas might pose the greatest threat, like China-based BYD, which sells an entry-level EV for just $9,700 in its domestic market. That model could soon make its way into Western markets like the United Kingdom and Europe, which have been happy hunting grounds for Tesla until now.
To combat this threat, Tesla recently announced plans to start producing an entry-level EV of its own in 2025. It could sell for as low as $25,000, and while that isn't as cheap as the BYD offering, it should be cheap enough to entice many consumers at the lower end of the market given Tesla's reputation as a premium EV brand.
Image source: Tesla.
Tesla's long-term success might rest on autonomous driving
Musk recently told investors they should think of Tesla as an artificial intelligence (AI) or robotics company, not a car manufacturer. Ark Investment Management agrees because the basis for its $2,000 price target is the company's full self-driving (FSD) technology.
FSD is still in beta mode, and there is no official date for its widespread release. However, it's expected to be available to all Tesla customers eventually on a monthly subscription basis, and Musk has also floated plans to license it to other automakers. On top of that, he wants to build an autonomous ride-hailing network at Tesla (think Uber but without human drivers), so customers can generate revenue from their autonomous vehicles when they aren't using them.
But FSD could be most valuable when installed in Tesla's upcoming robotaxi called the Cybercab, which is set to be unveiled in August. These vehicles could be deployed within a ride-hailing network full-time, operating around the clock to generate a revenue stream with a very high profit margin. They could also be sold to other ride-sharing companies like Uber or Lyft.
Ark believes Tesla will generate over $1 trillion in revenue by 2027 with $448 billion coming from autonomous ride-hailing and the Cybercab. To be clear, that is extremely ambitious given neither product has even hit the market yet, not to mention it would require Tesla to grow its revenue more than tenfold in the next three years, which seems practically impossible given the slowdown in its core EV business.
So, which Wall Street analyst is right?
It's difficult to refute GLJ Research's assertion that Tesla is overvalued. Based on the company's trailing-12-month earnings per share of $2.73 and its current stock price of $177.46, it trades at a price-to-earnings (P/E) ratio of 65.0. That's double the 29.5 P/E ratio of the Nasdaq-100 index.
Does Tesla stock deserve to trade at twice the average P/E valuation of its peers in the big tech sector given its earnings nearly halved in Q1 2024 because of slowing EV sales and price cuts? It certainly doesn't seem rational, but Tesla has always traded at a premium to the broad market precisely because of the technologies in its pipeline. They have expanded beyond FSD and robotaxis, by the way, to also include humanoid robots.
With that said, if Tesla were to trade in line with the P/E ratio of the Nasdaq-100, its stock would have to fall 55% to $80.54.
With that in mind, it appears GLJ Research is probably closer to the mark with its price target of $23.53 than Ark is with its target of $2,000. However, I don't think there is any way Tesla plunges 86% from here because it's still a sound business with truckloads of exciting future potential.
Still, it's hard to justify buying Tesla stock today. It might be best to wait on the sidelines until we learn more about the low-cost EV and the Cybercab later this year. Those products could dictate the stock's direction for the foreseeable future.
