Tesla (TSLA 3.14%) might be one of the most polarizing companies on the market. However, investors can't complain about the returns. Shares are up 3,300% in the past decade.
It's clear that the business and its visionary founder and CEO, Elon Musk, have received ongoing support from the investment community. This has occurred while Tesla's core operations have been under immense pressure.
If you're bullish on this electric vehicle (EV) stock, pay attention to this one warning sign.
Image source: Tesla.
What does the valuation reflect?
The major red flag that shouldn't be ignored is the current valuation. Shares trade at a price-to-earnings ratio of 375. That's an astronomically high figure that helps make Tesla one of the world's most valuable companies, as its market cap of $1.5 trillion is almost 5 times that of the next-most-valuable carmaker, Toyota. This is an inflated share price that adds significant downside risk should the company fail to deliver.
Tesla is a story stock. The market has fully bought into the grand vision Musk has introduced. He has trained investors to strictly focus on what the future might bring.
I'd argue that the valuation reflects an extremely high probability of success with robotaxis and robotics. There is still a lot of work to do, though.
While the robotaxi service is only operating in Austin and the Bay Area today, Musk believes his company will run a self-driving ride-hailing service throughout the U.S. as early as this year.
A mass market version of the robot, called Optimus Gen 3, is expected to be introduced this quarter. The plan is to ramp up production, bring costs down, and sell this machine to enterprise and household customers. Musk previously said that Optimus will lead Tesla to a $25 trillion market cap.
NASDAQ: TSLA
Key Data Points
Shrugging off the obvious concerns
Tesla's automotive revenue dipped 10% in 2025, and overall net income fell 46%. The core business of selling EVs has gotten weaker in recent years, as competition has intensified. Maybe Musk has decided that this isn't a game he wants to play anymore. Investors who care about fundamentals should proceed with caution.
However, the mentality of Tesla's shareholder base most likely resembles the mentality of a venture capitalist instead of Warren Buffett. And the core auto business likely accounts for only a small portion of the valuation.
Of course, if Tesla makes good on its promises, there is tremendous upside. In theory, if robotaxis and robotics are enormously successful, which is not a sure thing, then the company could be raking in incredible profits down the road.
It just doesn't help that expectations are already through the roof, with almost no room for error.
