Despite spending most of 2024 trading in the red, Tesla (TSLA +3.80%) stock is now sitting on a year-to-date return of 56%. Most of that gain came after Trump won reelection on Nov. 5, as Elon Musk's cash and influence were a big part of getting his campaign over the line.
Investors are speculating that the incoming Trump administration will regulate technologies like autonomous driving with a relatively light touch, paving the way for a huge financial opportunity for Tesla.
In fact, Ark Investment Management founder Cathie Wood believes Tesla stock is the biggest artificial intelligence (AI) play in the world because of the company's full self-driving (FSD) software and Cybercab robotaxi. But she isn't the only one who is extremely bullish.
Over the past month alone, Wedbush Securities and Bank of America both increased their price targets for Tesla stock to $400, with an analyst at Stifel raising his target to $411.
NASDAQ: TSLA
Key Data Points
Autonomous driving could be a game-changer for Tesla
Most of Tesla's revenue comes from selling passenger electric vehicles (EVs), but the company's robotaxi platform could change that completely. In fact, Elon Musk recently abandoned plans to launch a low-cost passenger EV, which would have helped the company compete with Chinese manufacturers and is diverting resources to the Cybercab instead.
The Cybercab doesn't come with pedals or even a steering wheel because it will run entirely on Tesla's FSD software. Musk plans to build a ride-hailing network in which the Cybercab can operate around the clock, bringing in revenue for Tesla by transporting passengers. Consumers will also be able to buy Cybercabs and operate ride-hailing fleets of their own.
The financial opportunity from FSD extends beyond the Cybercab. Owners of Tesla's passenger EVs can buy the software on a subscription basis, and Musk also floated the idea of licensing the technology to other car manufacturers.
Tesla is a $1.2 trillion company as of this writing, but according to Ark Invest, its valuation could climb to $8 trillion by 2029 because of FSD and the Cybercab.
With all of that said, unsupervised FSD isn't approved for use in any U.S. state right now, so it still has to clear regulatory hurdles before Tesla unlocks this financial opportunity. The path to approval might be easier under the Trump administration, but the Cybercab isn't scheduled to go into production until 2026.
Therefore, it isn't a great reason to pile into Tesla stock today, especially in light of the following two headwinds.
Image source: Tesla.
The first reason to avoid Tesla stock: Slumping EV sales
Tesla's passenger EV sales have grown every single year since the launch of its flagship Model S in 2011. It sparked a spectacular run for the company, with its fleet expanding to include the Model 3, Model Y, Model X, and Cybertruck.
However, signs of trouble emerged in 2023. The company's order backlog steadily declined amid growing competition, combined with softening demand due to challenging economic conditions. It still delivered a record 1.8 million EVs for the year, which was a 38% increase compared to 2022, but that growth rate was disappointing compared to Musk's forecast of 50%.
The picture continues to deteriorate. Through the first three quarters of 2024, Tesla delivered 1.29 million cars, which was a 2.3% drop compared to the same period last year. That means the company is on track for its first annual sales decline since it started delivering the Model S more than a decade ago.
Low-cost EVs from manufacturers in countries like China are becoming a real threat. BYD, for example, launched an EV called the Seagull, which sells for under $10,000 in its domestic market and is about to enter Europe. Tesla has a big presence in both China and Europe, so its sales could drop even further, especially after abandoning its own low-cost EV project.
Musk thinks deliveries will rebound with growth of between 20% and 30% in 2025, but it's completely unclear where the demand will come from.
The second reason to avoid Tesla stock: Its sky-high valuation
Tesla slashed the price of its cars by 25% (on average) in 2023, and EV prices have generally declined further this year. That's putting serious pressure on the company's profits -- its earnings per share (EPS) plunged 32% through the first three quarters of 2024 alone, compared to the same period last year.
That brings me to perhaps the biggest reason for pumping the brakes on Tesla stock right now. Based on its trailing-12-month EPS of $3.65, it trades at a price-to-earnings (P/E) ratio of 106.6. That's triple the P/E ratio of the Nasdaq-100 index, which includes many of Tesla's big-tech peers.
In fact, Tesla stock is significantly more expensive than every other U.S. tech stock with a valuation of $1 trillion or more -- its P/E ratio is almost double Nvidia's P/E ratio:
TSLA PE Ratio data by YCharts
Could FSD and the Cybercab transform Tesla's financial results? Absolutely. But it's going to take years. If the Cybercab is in production in 2026, investors probably won't see real revenues until 2027 and 2028. That's assuming FSD receives regulatory approval and that consumers actually want to use autonomous robotaxis. Neither of those things are guaranteed.
Finally, given Tesla's current stock price is around $390, the Wall Street price targets I mentioned earlier represent hardly any upside from here. As a result, now doesn't seem like a good time to rush into Tesla stock, and the picture probably won't look very different in 2025 either.
