Tesla (TSLA +0.91%) stock soared 63% last year, reaching a new all-time high in December, shortly after President Trump's election win. Investors speculated that a friendlier regulatory environment could help the company fast-track its autonomous driving and humanoid robotics technologies, which some Wall Street analysts believe could become trillion-dollar platforms.
In fact, CEO Elon Musk believes Tesla is on track to become the most valuable company in the world. He even believes there is a possibility it will be worth more than the next five largest companies combined -- today, those five companies would be Apple, Microsoft, Nvidia, Amazon, and Alphabet, and they have a total market value of $13.4 trillion.
However, Tesla stock is currently heading in the wrong direction with a 44% drop from its recent peak as of this writing. I don't think it has a legitimate pathway to becoming the world's most valuable company, and here's why I predict it might even lose a further 50% of its value instead.
Image source: Tesla.
Tesla's core business faces its biggest test ever
Despite the potential of its future products, 79% of Tesla's revenue still comes from selling passenger electric vehicles (EVs). There was a time when the company had the entire EV market almost to itself, but competition is now having a serious impact on its sales.
Up until late 2023, Elon Musk was telling investors that Tesla could grow its production by 50% per year. But deliveries grew only 38% that year, and in 2024, they shrank by 1%. The company can't produce more cars if they aren't selling, and early signs suggest 2025 could be significantly worse.
In January, Tesla's sales plunged more than 50% year over year in Europe. That included a near-60% drop in Germany, where sales of EVs overall actually grew 53%, suggesting Tesla experienced a severe drop in market share. Tesla's sales also fell 33% in Australia, which highlights how geographically widespread the weakness really is.
February wasn't much better as Tesla's sales plummeted 48% in Norway, which is one of Europe's biggest markets for EVs. They also fell 26% in France, 42% in Sweden, and 53% in Denmark. While official numbers haven't been published yet for countries like Germany or Spain, Tesla is staring down the barrel of another grim month in sales across Europe. The decline accelerated in Australia, where Tesla sold 71% fewer vehicles than it did in February last year.
Consumers appear to be buying cheaper EVs from low-cost producers like China's BYD, which sells its Seagull passenger vehicle for under $10,000 in its domestic market. BYD sold twice as many cars in China as Tesla did in January, which was once a critical market for Musk and his team. With the Chinese EV maker now aggressively expanding into Europe, Tesla might find it even more difficult to maintain market share because it simply can't compete on price.
NASDAQ: TSLA
Key Data Points
Elon Musk is betting the farm on autonomous driving and robotics
Musk has always been a forward thinker. He believes products like Tesla's full self-driving (FSD) software and Optimus humanoid robot have addressable markets that are orders of magnitude larger than the EV market. As a result, he's steering the company in those directions rather than engaging in a race-to-the-bottom price war with other EV producers.
Tesla's FSD isn't approved for unsupervised use in the U.S. just yet, but Musk thinks it could go live in Texas and California this year. The company can sell the software to owners of its passenger EVs, but the bigger opportunity lies with its Cybercab robotaxi. It will use FSD to autonomously haul passengers and even make commercial deliveries within a ride-hailing network that Tesla plans to create, potentially earning revenue for the company around the clock.
Wall Street analyst Dan Ives from Wedbush Securities thinks FSD could add $1 trillion to Tesla's market capitalization over time. Since the company is worth $830 billion as of this writing, that means this product alone could more than double its value. He isn't alone; Cathie Wood's Ark Investment Management thinks Tesla could generate $756 billion in annual revenue from the autonomous ride-hailing business by 2029, paving the way for a staggering $8 trillion valuation.
Since Tesla generated less than $100 billion in total revenue in 2024, it's hard to believe a segment that doesn't yet exist will produce that much revenue within the next five years, so I'm taking Ark's estimate with a big helping of salt.
But Musk thinks Optimus might be Tesla's most valuable opportunity ever. In a January conference call with investors, he said the humanoid robot could generate $10 trillion in sales over the long term because it has far more use cases than a car. He believes humanoids will outnumber humans by 2040, so we could find them in every business, factory, and maybe even household.
Tesla stock remains wildly overvalued
Tesla's earnings per share (EPS) plunged 53% to $2.04 in 2024. Shrinking EV sales were one reason for the decline, but the company also cut prices for most of its cars to shore up demand, which eroded its profit margins.
Despite the 44% drop in Tesla stock from its all-time high, it still trades at an eye-watering price-to-earnings (P/E) ratio of 128.6. That makes it significantly more expensive than Apple, Microsoft, Nvidia, Amazon, and Alphabet:
Data by YCharts. PE Ratio = price-to-earnings ratio.
For Tesla to become more valuable than those five companies combined, as Musk predicts, its stock would have to soar 1,500% from where it trades as of this writing. Given its premium P/E ratio and shrinking earnings, that is simply out of the question in the foreseeable future.
Products like the Cybercab and Optimus robot aren't expected to reach mass production until 2026 or later, which means Tesla has to rely on its passenger EV sales to carry its business for at least the next year. Given the rate at which deliveries are shrinking in key markets like Europe, I think the company is in for another sharp drop in its earnings in 2025.
If that proves to be the case, Tesla stock could be facing further downside of 50% or more over the next 12 months. It would have to decline more than 70% just for its P/E ratio to trade in line with Nvidia, which is one of the fastest-growing large-cap companies in the world. Tesla's premium valuation is becoming more difficult to justify by the day.
