Tesla (TSLA 1.82%) is among the hardest companies for investors to put a finger on. The company pioneered electric vehicles, but its aspirations have expanded Tesla into energy, robotics, and artificial intelligence (AI). Fleets of self-driving vehicles and humanoid robots performing tasks for people sound exciting, but how long should investors expect to wait for these opportunities to translate to real-world profits?
Meanwhile, Tesla's current core business, selling electric vehicles, is struggling.
Do Tesla's future promises justify buying the stock today?
Here is what you need to know.
A high-stakes bet on autonomy
CEO Elon Musk has increasingly pushed Tesla's chips to the center of the table. The wager? Tesla will finally perfect autonomous driving and launch its highly anticipated Robotaxi business. He even said on Tesla's Q2 earnings call that investors shouldn't own the stock if they don't believe it will happen. Tesla's pursuit of autonomous driving isn't new; Musk stated in 2013 that Tesla's autopilot technology should be able to drive 90% of miles within three years. While 2016 came and went, the technology has made strides, especially within the past year when it implanted neural nets to process a vehicle's surroundings instead of code.
Tesla has made enough progress to announce a Robotaxi unveiling event in early October. Keep in mind that unveiling and launching are two very different things. Tesla unveiled Cybertruck in 2019 with an estimated 2021 launch but didn't deliver its first units until November 2023.
The conundrum is figuring out how long it takes between Robotaxi's unveiling and an actual product launch.
NASDAQ: TSLA
Key Data Points
According to Musk, Robotaxi would be as simple as turning it on and watching your Tesla venture off, generating income as it shuttles people wherever they want. Of course, this means that FSD driving 90% of miles isn't good enough. It's going to need to be virtually perfect for liability reasons. Some early reviews of FSD's newest version, 12.5, still indicate struggles with decision-making and inclement weather.
Remember that progress isn't a straight line, so be careful when projecting FSD improvements in the future. FSD could be 98% perfect, but that final two percent could take the longest.
Few will deny a Robotaxi's potential, but just like in finance, the longer you wait for cash flows, the less they are worth today.
Is the EV transition stalling out?
Tesla grew on years of widespread EV adoption. That trend isn't dead by any means, but some cracks are showing in the narrative. While Tesla's Q2 deliveries exceeded the market's expectations, volumes declined by 5% from a year ago. It's not like people aren't buying, at least in the United States; new vehicle sales grew 0.1% year over year in Q2.
So, what's the problem? It seems that consumers could be pushing back against battery EVs. According to a McKinsey survey of U.S. EV buyers, nearly half plan on returning to gas vehicles due to concerns including lacking charging infrastructure, high ownership costs, and insufficient vehicle range. Hybrid vehicles address these concerns and could be Tesla's actual competition.
Tesla's cited data shows that worldwide EV adoption outside China has virtually stagnated for the past year:
Source: Tesla Q2 Earnings Presentation.
Currently, government policies remain favorable to lowering emissions. In Q2, Tesla sold $890 worth of regulatory credits, contributing 34.6% of its gross profit in automotive. These credits help Tesla tremendously, but don't assume they'll be there forever. Politicians generally strive for reelection, so consumer preferences can impact politics. It's not panic time, but investors should closely watch how the consumer attitude toward EVs evolves.
Shares are down 50% -- time to buy?
Wall Street seems aware of the points I've raised; Tesla stock is currently down about 50% from its peak a couple of years ago. The tricky part is figuring out whether that's enough to make the stock attractive in the face of two notable risks:
- Robotaxi and other long-term catalysts may take longer than promised.
- The vehicle business may continue to struggle.
Ultimately, your conviction in Tesla's autonomous technology will play a big part in how you see the stock. If Robotaxi is imminent, investors can look past Tesla's current EV struggles because it would likely generate highly profitable revenues, dramatically boosting earnings power. Conversely, the stock could have more downside if investors weigh the vehicle business more.
Analysts believe that General Motors, a traditional automotive company, will grow its earnings by 10% annually. Its stock trades at a mid-single-digit P/E ratio. Tesla is expected to grow earnings at a 20% annualized rate, and it trades at a P/E ratio of 86 today. Investors are paying a hefty premium for Tesla's Robotaxi potential.
Tesla may never trade anywhere near where General Motors trades and still be a lousy investment if things don't go well. Consider Tesla a high-risk stock that investors should approach carefully.
