Tesla’s stock defied gravity for years. Is Elon Musk’s EV party over?

By Chris Kirkham

(Reuters) - Tesla’s stock has dropped by nearly half in three months. Even so, investors are still debating whether Elon Musk's electric-vehicle maker remains overpriced.

The company's market capitalization has dropped 45% since hitting an all-time high of $1.5 trillion on December 17, erasing most of the gains the stock made after CEO Musk helped finance the election victory of U.S. President Donald Trump.

And yet Tesla continues to fetch a valuation far above those of the world’s biggest automotive and technology firms, judging by standard financial metrics. That’s because most investors and analysts have bought Musk’s pitch that the world’s most-valuable automaker isn’t really a car company at all, but rather an artificial-intelligence pioneer that will soon unleash a revolution in robotaxis and humanoid robots.

Tesla’s electric-vehicle business accounts for almost all of its revenue but less than a quarter of its stock-market value, according to a Reuters review of more than a dozen analyses by banks and investment firms. The bulk of its worth rests on hopes for autonomous vehicles Tesla hasn't yet delivered, despite Musk's promises in every year since 2016 that driverless Teslas would arrive no later than the following year.

The stock’s decline since December stems from falling vehicle sales and profits; protests of Musk’s political activity, including his mass firings of U.S. government workers as a senior Trump advisor; and investor worries that politics are distracting the world’s richest man from tending to his cash cow. Still, Tesla’s market capitalization remains up about $65 billion since the election – an amount higher than the entire value of General Motors.

Tesla’s total worth of $845 billion still tops the next nine most-valuable major automakers combined, which collectively sold about 44 million cars last year, compared to Tesla’s 1.8 million.

Investors have long bet on Musk’s visions of Tesla’s tomorrow rather than its profits today. But the widening gap between its real-world performance and analysts’ earnings estimates for unborn products has prompted some to warn of irrational exuberance.

“For how much longer can the stock remain divorced from the fundamentals?” JP Morgan analyst Ryan Brinkman wrote in January, after Tesla reported poor earnings and its first-ever annual vehicle-sales decline.

Tesla and Musk did not respond to requests for comment. In July, Musk said investors who don’t believe Tesla would “solve vehicle autonomy” should “sell their Tesla stock.”

ROBOTAXI PIVOT

Tesla’s previous peak value of more than $1.2 trillion came in 2021, in response to concrete achievements. Soaring sales of its ground-breaking Model 3 and Model Y had proved that EVs could sell profitably in mass volumes. Musk vowed then that Tesla would produce even cheaper EVs and sell 20 million vehicles annually by 2030, nearly double what the world’s largest automaker, Toyota, sells now.

Musk, however, shifted from the mass-volume goal last year. In April, Reuters reported Tesla had killed a long-awaited, all-new $25,000 “Model 2” that investors had counted on to drive growth. Since then, Musk has pitched investors on Tesla’s robotaxi focus.

The pivot was persuasive: Tesla shares jumped 71% from last year’s low in April through the November election, even as its EV sales stalled and profits fell.

Then the stock nearly doubled in the weeks after Trump’s election. Musk spent more than $250 million supporting Trump and now serves as his top advisor on slashing government staff and regulations.

Musk’s political clout has convinced bullish analysts that Trump will clear regulatory roadblocks to deploying a vast fleet of Tesla robotaxis. Tesla, however, already faces little oversight from many U.S. states, which control most autonomous-vehicle regulation. Texas, where Musk promises to launch fare-collecting robotaxis by June, has barred cities from regulating them.

“There’s absolutely nothing stopping him from releasing this self-driving technology right now,” said Gordon Johnson, chief executive of investment-advisory firm GLJ Research, which recommends shorting Tesla’s stock. The tech isn’t road-ready, Johnson argues: “If he released it tomorrow, the jig would be up. These things would be wrecking across America.”

Tesla has faced lawsuits and federal investigations into accidents, including fatalities, involving the driver-assistance systems it has marketed as Autopilot and Full Self-Driving. The company warns consumers the systems don’t make its cars autonomous and require drivers to pay strict attention. Musk has long said Tesla’s technology will soon be safer than a human driver.

FALLING SALES, RISING COMPETITION

The automaker’s core EV business is struggling. The only vehicle Tesla has launched since the 2020 Model Y is the Cybertruck. The triangular pickup had sales of 38,965 units last year, Cox Automotive estimates, well below the 250,000 that Musk initially predicted Tesla would produce by 2025. Tesla has also cut prices on the now-aging models 3 and Y amid slowing electric-vehicle demand globally and rising competition, especially in China, where EVs start below $10,000.

New data also show sharp Tesla-sales declines this year in European markets following Musk’s embrace of far-right political movements there.

Tesla now faces headwinds from the president Musk helped elect. Trump, a frequent EV critic, has called for scrapping EV subsidies and policies that have added billions of dollars to Tesla’s bottom line. Musk has dismissed the impact on Tesla of losing subsidies, saying rivals would suffer more.

When Tesla reported a 20% drop in annual operating profit in January, analysts on the earnings call asked no questions about Tesla’s financials or falling EV sales. They focused instead on Musk’s promises of “autonomous ride-hailing” in Austin, Texas, by June and a wider driverless-vehicle launch by year-end. Tesla shares rose 3% the next day.

Tesla still trades at huge premiums, as measured by forward price-to-earnings ratios. The measure is used by investors to judge whether stocks are fairly valued. A high ratio suggests shares might be overpriced.

Tesla’s forward PE ratio is more than nine times the average of the next 25 most-valuable automakers. It’s quadruple that of BYD, the Chinese automaker that passed Tesla last year as the world’s top EV seller.

Unlike Tesla, BYD also has a booming business in gas-electric hybrids, driving total 2024 sales to about 4.2 million units, more than double Tesla’s deliveries. Yet BYD’s market capitalization is less than a sixth of Tesla’s.

Tesla's forward PE ratio also is more than double or triple those of tech giants Nvidia, Apple, Meta Platforms, Alphabet, Amazon.com and Microsoft — the other six high-flying stocks, along with Tesla, known as the Magnificent Seven.

OPTIMISTIC MODELS

Bulls discount standard financial metrics for judging Tesla's potential, arguing Musk is singularly capable of leading a transportation revolution. He has said robotaxis and robots will make Tesla the “most valuable company in the world by far.”

Brian Mulberry, client-portfolio manager at Tesla investor Zacks Investment Management, said Musk “always pulls off the technology,” despite long-running concerns about his “mad-scientist personality.”

Most analyst models reviewed by Reuters remain bullish.

Such models typically justify Tesla's market value by breaking it into several categories: Its auto business, including services such as EV charging (now 90% of revenue); its energy-generation and storage business (10% of revenue); and three embryonic businesses: robotaxis; licensing or subscriptions for self-driving technology; and Optimus humanoid robots. Three such models in January rated EV sales as a relatively minor factor in Tesla's expected growth.

Truist Securities attributed just 9% of Tesla's value to car sales, 21% to driverless-tech services, 17% to robotaxis and 34% to robots.

Bank of America’s model attributes about half of Tesla’s value to robotaxis and 28% to self-driving software subscriptions.

Morgan Stanley attributes 21% to robotaxis and 39% to subscriptions for autonomous-tech and other services.

Tesla investor Ark Investment Management projects the stock will hit $2,600 by 2029, with robotaxis accounting for 88% of the company's value. Ark forecasts Tesla could produce millions of robotaxis by then, generating about $760 billion in annual revenue. That would be more than Walmart, the world’s largest company by revenue.

Tasha Keeney, Ark’s director of investment analysis and institutional strategies, said she believes Tesla will achieve such growth by slashing the cost-per-mile of ride-hailing, making human drivers obsolete.

“It’s cheaper than driving your personal car,” she said. “Maybe people will stop even driving.”

TESLA TECH 'DOES NOT WORK SAFELY’

Trump could potentially clear the path for driverless cars with no steering wheels or pedals because the federal government regulates the safety of vehicle designs. Musk last October unveiled a concept car with such a configuration, the two-door Cybercab, saying it would go into production in 2026.

But individual states govern autonomous-vehicle travel on public roads, limiting Trump’s influence. Some states, including Texas, have few rules. Tesla’s largest U.S. market, California, requires extensive driverless testing under state oversight before granting robotaxi permits.

A Trump move to loosen robotaxi regulation could benefit all competitors, not just Tesla. The tiny U.S. robotaxi industry, for now, is dominated by Alphabet’s Waymo, which operates hundreds of driverless taxis in cities including Los Angeles and Phoenix.

Waymo and most other autonomous-tech developers seek to ensure safety with many overlapping technologies, including artificial intelligence, radar and lidar. Tesla aims to develop much cheaper robotaxis by relying solely on cameras and AI.

Some investors doubt Tesla has found a unique path to cut-rate robotaxis. Mark Spiegel, an investment manager at Stanphyl Capital Partners, is shorting Tesla’s stock, an investment that pays off if shares fall.

Tesla’s approach to robotaxis “does not work safely and never will without radar and lidar,” Spiegel said.

And China's BYD said last month it would offer — for free, as a standard feature — a driver-assistance technology similar to the Full Self-Driving system that Tesla sells in China for more than $8,000.

“BYD is telling you there’s no value in self-driving,” said Johnson, the GLJ Research analyst. “In fact, it’s so valueless that we’ll give it away.”

(Reporting by Chris Kirkham. Additional reporting by Abhirup Roy, Noel Randewich and Geert De Clercq. Editing by Brian Thevenot and Michael Williams.)