Summary
Tesla, Inc.'s core auto business faces declining sales and margins, with increased competition and market share losses, especially in the US and China.
The energy generation and storage segment is growing rapidly, but potentially not fast enough to offset auto revenue declines; Robotaxi's future remains uncertain.
Political changes and regulatory shifts could impact Tesla's financials, with potential risks from tariff hikes, emission standards, and EV tax credit changes.
Despite high valuations, Tesla's technology leadership and potential new revenue streams make it a Hold, with key metrics to watch for future performance.
Tesla EV electric vehicles on display. Tesla products include electric cars, battery energy storage and solar panels.
Tesla, Inc. (NASDAQ:TSLA) is one of the most well-known and valuable companies in the world, a leader in EVs, and one of several businesses currently led by Elon Musk. Tesla earns 90% of revenue through auto-related activities, including leasing and service, and about 10% through the energy generation and storage segment, including products like Tesla Solar roof and Powerwall. The energy generation and storage (EG&S) segment is growing rapidly, 50% YoY in the Q3 earnings report. Tesla shares have risen to new highs, with catalysts including the “We, Robot” event introducing the Robotaxi and the election of Donald Trump.
But what does Tesla’s actual business look like today? I’ll look at the core automotive sales and service business, gross margins for each segment, and how Tesla’s revenue streams are changing. I’ll also offer some thoughts on Robotaxi, politics, and how I’m thinking about Tesla’s value versus its valuation.
Snapshot Analysis
Auto sales down, inventory up, US market share falling, China and RoW stagnant
Auto sales revenue is down -7% YoY, and auto-lease revenue down -15%. Most of the difference in auto-related revenue is made up from service and other, including Supercharger fees, up 25% YoY. At the same time, auto inventory is up 10% YoY.
Keeping in mind Tesla is still primarily a car company, and will be for at least two or three more years, this does not look great to me. Service revenue increases are not the type of growth most investors are looking for from Tesla. It may indicate a worsening customer experience as more components break outside of warranty, services prices for parts/labor are increasing, or some combination of these and other factors.
The silver lining here could be a significant part of the increase coming from paid Supercharger use, connected to increased DC fast charging demand overall (also relevant to my recent analysis of EVgo). But since Tesla doesn’t break out these revenue sources, and total Tesla auto sales are down so far in 2024 (less Supercharger use growth), I suspect most of the increased revenue comes from the service side.
The story is not helped by the ongoing decline in Tesla’s US EV market share, where Tesla has fallen below 50%. The top 5 competitors (General Motors (GM), Ford (F), Hyundai and Kia (OTCPK:HYMTF), Honda (HMC), and BMW (OTCPK:BMWKY)) have been making almost continuous gains over the last two years:
Chart showing Tesla US EV market share falling from 75% in 2022 to 48% in 2024
A 29% growth in Tesla auto sales during this period wasn’t enough to arrest this decline from about 75% market share to less than 50%.
Chart showing Tesla auto sales growing 29% since 2022
This is an especially important metric because the US is actually the only market in which auto revenue is increasing, versus falling in China and the rest of the world, compared to 2023:
More recent data from after the Q3 report help things look a little better in China, but the sales trend seems basically flat since the middle of 2022:
Chart showing monthly Tesla auto sales in China
Tesla has a 7% market share for EVs in China, and will need significant sales growth in the country to see that share increase.
With EVs making up a growing share of US auto sales, Tesla has been able to keep growing deliveries even while market share falls. But with intense competition in China and the rest of the world, especially for lower-cost vehicles, it seems growth is at risk of stalling in these more mature markets.
Lower interest rates make Tesla alternatives more attractive, auto-gross margins under pressure
Tesla’s cash pile allows them to offer financing at attractive rates compared to automakers that use the prime rate and see financing income as a bigger part of their business. However, if the FED continues to cut rates, as they have been doing and as Trump is likely to pressure them to do, financing for other EV brands will continue to become more affordable.
Tesla has already been dropping prices through 2024, and in light of market share declines and stagnating sales growth, may need to continue to do so. The only real reassurance we got on the Q3 earnings call was a predicted “20-30% increase in auto sales volume,” apparently based on the rollout of the most affordable Tesla vehicle yet, the “Model Q.”
At the end of the “Outlook” section of the Q3 earnings presentation, under “Product,” Tesla indicates combining elements of their next-generation platform and existing production practices “…will result in achieving less cost reduction than expected…” when rolling out the Model Q. Auto margins are already under pressure. Even if Tesla goes on to sell more than 800k vehicles in 2025 (25% increase from 640K in 2024, which could also be a high estimate), revenue growth may not follow as strongly.
Tesla booked more than $2 billion in revenue from the sale of energy credits in the first nine months of 2024, helping boost auto sales and lease margin by 3%. These credits have been an important part of Tesla’s business for years, but I’m skeptical that this line of essentially pure profit can keep growing and supporting auto-margins. Pressure will come from multiple angles; as competitors ramp up EV sales, automakers will need to buy fewer credits overall, and manufacturers that grow EVs as a share of their business will be in a stronger position to compete for the sale of credits. There’s not much information publicly available about who exactly purchases credits from Tesla, but it stands to reason that these counterparties may be eager to make deals with other automakers after years of having few options besides Tesla.
Auto margins have declined 10% or more over the last four years, while auto sales as a percentage of revenue has fallen 8%. Service and EG&S have both grown around 4% as a percentage of revenue in that time, with service margins considerably weaker and EG&S considerably stronger than the auto segment. Together, it looks like this:
There’s too much noise in the data to reliably forecast how these figures will evolve in 2025 and beyond. However, my intent here is to show that auto margins have been falling for years, and it’s not immediately clear that service margins will expand enough to stop dragging down the strong margins from EG&S. Should EG&S margin expansion stall, or should service share of revenue grow faster than EG&S, downward pressure on gross margins, and thus operating income, could continue.
Falling auto-gross margin (excluding credits) also does not seem to square with discussions by management on the Q3 call about “revolutionary” new manufacturing processes reducing costs to account for lower ASP. However, perhaps that is forthcoming, like so many of Tesla’s in-development projects.
Will Robotaxi take over the world?
Pattern based neural networks, especially with only video input, will struggle to gather enough data to account for long-tail edge cases that create some of the most dangerous driving conditions.
Cars can’t rely on cloud-based data processing the way nearly all the impressive LLM AI models have, and the complexity of real-world driving conditions is regularly far greater than any text-based prompt or reasoning can be. “Miniaturizing” Full Self-Driving (FSD) software to function effectively using onboard hardware that can adapt to essentially all conditions seems like a requirement for mass market adoption of AVs. I suspect this will turn out to be a more difficult challenge than Tesla bulls are anticipating.
Businesses like Google's (GOOG)(GOOGL) Waymo have been developing AVs for years, with a significantly more robust suite of sensors and onboard hardware, and are just now rolling out slowly to a handful of cities beyond the initial sandbox of San Francisco. In my view, this predicts a relatively slow and challenging rollout of Tesla AV services. And as demonstrated by Cruise, it only takes one or two high-profile malfunctions to put the brakes on any AV rollout approval for months or years.
In my own personal view, it will be at least half a decade before AVs can function reliably in some of the most populous east coast cities; those who drive in these places know that road signage and other cues can be lacking, even for human drivers, and the often bizarre traffic geometry will be a high hurdle for AVs to overcome with consistency. That doesn't mean they won’t work in much of the rest of the country, but the AV rollout may not be as straightforward as many imagine.
Political considerations
The close relationship between Donald Trump and Elon Musk served both very well during the campaign season, but I’m not sure things will last once Trump is in office. Raising tariffs will hurt all automakers, and if costs are inflated for more than 6–12 months, it seems inevitable the impact would start to show in Tesla’s auto sales gross margin. Relaxing emissions standards could eat into Tesla’s regulatory credit revenue. And if the EV tax credit really is going away, it will be harder for Tesla to increase penetration in the US with lower cost vehicles. Even if Elon ostensibly supports this, it certainly seems at odds with the push for 20-30% auto sales volume growth projected for 2025.
Relaxing standards for AVs may be possible, but I’m doubtful it will be a priority once Trump is in office. Either way, such a move would ease the path to widespread adoption for all the players in the AV market, not just Tesla. That includes Waymo, and other competitors like Aptiv (APTV) and Aurora (AUR). A regulatory green light could even entice deep-pocketed players like Amazon (AMZN) to push harder to expand the footprint for Zoox, acquired in 2020.
Trump changes his mind a lot (or deliberately obfuscates his real views to strengthen his hand in negotiations), so all or none of these things could happen. I don’t have a crystal ball, but I suspect the relationship between Trump and Elon will become less friendly as time goes on.
Comparable Analysis
Comps for a company like Tesla are difficult because the market price is, in my view, based more on market hype and vague expectations about future products and success, versus any fundamental valuation. Nevertheless, when looking at the business Tesla is today, Airbus (OTCPK:EADSF) seems like a reasonable fit; a manufacturing business with growing sales and demand, some competitors but few that seem truly “on top of their game,” and real risks to the business based on high-profile incidents or malfunctions.
With similar margins (especially after removing regulatory credits from Tesla) and Airbus actually beating Tesla in YoY revenue growth, Tesla is still valued approximately 4x higher than Airbus on a blended Price/Book and EV/EBITDA basis. A comparable valuation would give Tesla a price something like $110 today.
Of course, Tesla has several exciting potential revenue streams that are being priced into current valuations, and this simple analysis doesn’t account for additional growth in EG&S and a potential auto sales rebound with continued sustained growth. But looking purely at the business operating today, this envelope math for Tesla the automaker makes sense to me, especially since Tesla shares traded as low as $142 less than a year ago.
Risks
Risks for bulls:
Tesla faces intense competition in the EV market, both from traditional automakers and startups like Rivian (RIVN) and Lucid (LCID). If Tesla starts to lose market share faster than overall EV growth can make up the difference, that alone could put pressure on sky-high valuations.
Changes in the AV landscape from additional competitors or high-profile mishaps could bring the hype back down to Earth for the euphoric investors expecting Robotaxi to take over the world. And it is yet to be seen where EG&S margins will remain above 50%, and if that business can scale fast and large enough to make up for flat or falling auto sales, or tight service margins.
No matter what Elon says, killing the EV tax credit or loosening emissions standards will put pressure on Tesla’s core auto business, which drives cash flow for R&D and is ultimately still the foundation for everything else.
At this valuation, it is much easier for bad news to push prices down than for good news to push them up.
Risks for bears:
Tesla is still a technology leader and arguably still the only true producer of “software defined vehicles” across the entire fleet. This is a serious competitive advantage that makes it easier for Tesla to retain existing customers. It can offer a better experience after the initial purchase, and bring feature updates that make it difficult to switch from a Tesla once you’ve gotten used to it. A lower-cost introduction to this experience through the Model Q could drive more sales and revenue than 2024 trends suggest.
Regulatory changes could speed and ease the deployment of Robotaxis, adding a new stream of revenue and creating a new sales channel for Tesla vehicles. EP&S could continue to grow rapidly, changing the nature of Tesla’s business with increased margins and more diverse revenue faster than anticipated, making high valuations more justified.
Elon is a master of hype, maximizing the value of good news, and keeping his businesses in the spotlight. Irrational valuations can persist for many quarters, and it’s not impossible for Tesla’s value to catch up with its valuation meanwhile.
Conclusion
In my view, Tesla’s stock price does not have a strong connection to the state of the business that exists today. Even with the most optimistic possible expectations for EG&S and auto sales growth, the stock is trading for at least double what it’s worth, and probably somewhat more than that.
That said, the prospects for the business are as good as for any you can buy today (even if the price you pay doesn’t seem fair), with high-margin revenue streams growing quickly and others like Robotaxi in play to add more.
The biggest problem I see is that it's currently unclear when Robotaxi will even launch, let alone generate meaningful revenue. With the core auto business under increasing pressure, will the hype be enough to keep valuations lofty if revenue takes years to catches up?
Personally, I don’t think so. But many have bet against Elon and lost lots of money, and there are too many things that could go right to be on the wrong side of that trade.
I give Tesla a Hold rating; I won’t be buying at these prices, but if you believe in the strong prospects for the business and don’t need the liquidity, I couldn’t recommend selling, either.
Investors should watch for 1) how auto revenues play out for FY 2024 and the first half of 2025, and whether auto-gross margin excluding regulatory credits continue to trend down, 2) how quickly EP&S ramps, and if 50%+ margins are sustainable into 2025, and 3) how quickly Tesla can set up and derive meaningful revenue from the Robotaxi business.
A disappointing result for any of these factors could move Tesla from a Hold to a Sell, if the core business continues to weaken and other revenue starts to look less promising. Tesla could be a Buy if valuations came down to levels that reflect the value of the business today, including a smaller premium for potential revenue growth from EG&S or Robotaxi.
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