Tesla Motors shares are priced on hopes for robotaxis, full self-driving cars and robots.
'Musk attempted to appeal to a F-150 and Ram crowd that hates his cars, while completely losing the Tesla crowd that loved his cars.'
Tesla is anything but a boring stock, I'll give it that. It is also tremendously overpriced.
The Elon Musk vs. Donald Trump battle sure has captured the news cycle. It is captivating from both sides of the political aisle, and the reaction of Tesla Inc.'s stock to these headlines has been nothing short of unstable, explosive and precarious.
As a result, there is a big picture about Tesla that many are missing.
Three years ago, fans of Tesla were certainly much more excited about their automotive manufacturing business than they are today. Back then, quick EV adoption appeared inevitable, Tesla had the technological lead and the overwhelming market share lead in EVs.
A great deal has changed since.
First, overall demand for pure battery electric vehicles (BEVs) turned out not to be as high as investors expected. Tesla consequently was forced to cut prices, which pressured margins. Moreover, expected new model launches at Telsa never materialized (or were "delayed"- much like the anticipated debut of Tesla's robotaxi program earlier this week).
Meanwhile, Musk's dalliance and subsequent reversal of fortunes with Trump and MAGA simultaneously confused Tesla's core customer base. In the views of one of our close friends, "Musk attempted to appeal to a F-150 and Ram crowd that hates his cars, while completely losing the Tesla crowd that loved his cars."
The amount of U.S. government subsidies that Tesla directly and indirectly receives is staggering.
Meanwhile, the amount of U.S. government subsidies that Tesla directly and indirectly receives is staggering. Consequently, Musk may be accelerating pressure on the large subsidies enjoyed by Tesla buyers (federal tax credits, which indirectly go straight into Tesla's pockets) as well as the subsidies enjoyed by the company directly (in the form of regulatory credits).
Finally, and at the worst possible time for Tesla, traditional competitors have started ramping up with marketable EVs, and new competitors (especially in China) started developing products too, with tremendous success.
Consequently, the expectations that people had three years ago did not materialize. Not even close. Even the flagship Models 3 and Y have been disappointing, and the Cybertruck has been a disaster.
In June 2022, the investment community expected Tesla to mint more than 3.6 million units of sales in 2025. Today, those expectations are down 45%. Moreover, price cuts have driven Tesla's average selling prices down by roughly 25%. Taken together, expectations for total Tesla 2025 automotive revenues are down almost 60% in this short period.
Table showing projected Tesla unit sales and revenue changes from June 2022 to June 2025.
And what this meant for the P&L and financials for Tesla have not been good at all. In the table below, you can see how bad it has been. Total revenue expectations for 2025 are down 40%, gross margins are down 34%, operating margins are down 56% and earnings expectations are down 68%.
Tesla financial data: June 22 vs June 25. Shows revenue, margins, and EPS.
And how has Tesla stock reacted to the plunging expectations for revenues and earnings?
It's up almost 30% in the past three months.
Yes, during this period of severe fundamental deterioration, the stock has risen to $320 a share from $240. And in the euphoria following Trump's election and Musk's initial alliance with him, the stock actually approached $490 a share in mid-December.
There's nothing fundamental justifying the stock's recent gain. In fact the (terrible) first-quarter numbers suggested the opposite reaction was warranted. How did this happen?
Chalk it up to "thesis drift." Here's what that means: Investors, specifically Tesla bulls, three years ago believed in an EV future where Tesla would become the Apple of automakers, and everyone else would become Nokia, Blackberry or Motorola. Now they don't even care about Tesla's auto business.
Today, the story, evidently, is all about Tesla's AI-enhanced full self-driving (FSD) vehicles and robotaxis, and about Optimus, the humanoid bipedal robot that Tesla is designing. Musk said this week that Tesla's robotaxi service in Austin will roll out later this month. And this has Tesla fans extremely excited. Never mind that Waymo is already in four cities, including Austin, and is booking 250,000 autonomous rides per week in Austin, Phoenix, San Francisco and Los Angeles. In the mind of a Tesla investor, Waymo, which is owned by Alphabet, doesn't have the same caliber of code writers that Tesla has. Funny that.
And given Musk's ability to use social media to drive Tesla stock significantly higher without traditional fundamental justification (some call this "pumping") you have buyside (institutional) investors reluctant to step in and attempt to make markets efficient by shorting the stock. As a result, there is a strong argument that we don't have proper "price discovery" for Tesla shares.
And at $320 per share, this is a company experiencing negative sales and earnings growth, trading at an EV/sales of nearly 12x, a 2025 P/E of over 170x, and sporting a $1 trillion market cap.
Let those figures sink in.
Importantly, our view is that the value of the automotive business within Tesla not only represents a small portion of its current market cap - but is worth much less than even we expected a few years ago.
If we compare Tesla's sales and market cap to that of other auto manufacturers, a picture can be worth a thousand words.
Bar chart showing automaker sales in billions for fiscal year 2025.
Bar chart comparing the market caps of various automakers, showing Tesla's significantly larger market cap.
Tesla has Mr. Market distracted right now, and he's ignoring the possibility that Tesla's share price already reflects the company's best possible outcome.
So, what investors must determine going forward is less about the future for Tesla automobile manufacturing and more about the prospects for FSD, robotaxis, energy and other projects in Tesla's skunkworks - because that is clearly what is driving the share price and market cap.
To start this, we can make a simple determination of what the automobile business is worth. And, by implication, the balance must be these other "Musk Options." In auto-land, the average P/E for Ford, BMW, Mercedes, GM, Renault, Stellantis and Volkswagen is 6.5x. Include Honda, Toyota and SAIC, it is 7.7x.
If we assume the Tesla automotive business - despite all the deteriorating metrics mentioned above - is a better business and deserving of a higher multiple than each of them (which is debatable), perhaps we can say it should be worth a P/E of 10x. Maybe we could even say 15x.
And at a 2025 P/E of 15x, Tesla's auto business would have market cap of $100 billion. That is still a heck of a lot, more than any other automaker except Toyota (which generates 5x more sales and Ebitda), and about the same as BYD.
And if we assume we are close, that means that the market already values Tesla's FSD, robotaxis, Optimus and the energy business at roughly $1 trillion. And for the Tesla fans laughing at our valuation of the automotive business, even if Tesla's automotive business were worth twice that amount (a P/E of 30x), the "Musk option" would be valued at $900 billion.
In other words, Tesla's share price already assumes - and prices in - a tremendous amount of success for Tesla's non-automotive manufacturing businesses.
Now, clearly, Waymo, Baidu, Mobileye Global Inc. and others have a much different opinion about Tesla's prospects in autonomous driving and robotaxi profitability. Many industry observers do too. But suppose robotaxis become a thing: who will win? And will there be only one "winner"? Perhaps most importantly, how much is there to win? How much demand will there really be for autonomous vehicles?
It is unfathomable that most people will actually not want to drive their cars. It is incomprehensible that people, outside of big-city commuters who don't like trains, will want to surrender the experience, enjoyment and responsibility of driving to a machine. In our view, demand may not be as high as some think.
And even if people ultimately do want to have an autonomous vehicle, or are one day forced to do so by government regulators, this isn't months or even years from now for the majority of drivers. It'll take decades.
That means we'll need to discount those future prospects back to the present. And if you are sure that something will be worth $100 in 20 years, and you want to make 15% a year while you wait, then you better not pay much more than about $6 to buy it today. That's just math.
Finally, if Tesla's FSD does "win," and if its software is installed on more than just Ubers/Lyfts/taxis and ride-sharing apps, then how much will consumers pay for the software that makes their cars autonomous?
At the outset, the early adopters will pay whatever price they have to, but we shouldn't want to make the mistake of extrapolating that (as investors in Tesla's automotive prospects did). Instead, objectively estimate what things might look like as the technology spreads.
So, the question is this: Will we all want to subscribe to an autonomous-driving software vendor like we do with Apple or Android and our phones? Or will competition eventually force autonomous to be standard for all cars, like cruise control?
How much will that cost? We're guessing that the price is somewhere between free and expensive. We will find out one day, of course, but in the meantime it appears that Tesla has Mr. Market distracted right now, and he's ignoring the possibility that Tesla's share price already reflects the company's best possible outcome.
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