To The Moon

$Tesla Motors(TSLA)$

Tesla's Decline in 2025

Tesla is down nearly 50% from All Time High in 2025, and I don't think many investors should be surprised by this. It's widely accepted that Tesla's stock was overvalued, even among its biggest supporters. While they may have acknowledged the overvaluation, they were still willing to hold onto Tesla shares due to the positive momentum surrounding the company, especially boosted by Tesla's CEO’s relationship with President Donald Trump, which generated even more enthusiasm. It became more about momentum than actual business fundamentals. Now that the stock has corrected by 42%year-to-date, this drop shouldn’t come as a shock.

Weak Business Fundamentals

The company’s business fundamentals haven’t been great either. In the most recent quarter, Tesla’s revenue grew by just 2%, which is underwhelming, especially for a company with such high valuations. Tesla’s revenue growth has been slowing for years, and there’s little indication that it will accelerate anytime soon. Investors seem more focused on what Tesla might achieve 5 or 10 years down the road, often overlooking the near-term challenges, which are significant.

Near-Term Headwinds and Increased Competition

Tesla's revenue growth is slowing, profit margins are falling, and this morning, one of its major competitors in China announced plans to launch charging stations that are twice as fast as Tesla's. This is particularly concerning in China, where Tesla’s competitive edge is weaker due to its less advanced self-driving technology compared to the U.S. Additionally, reports from January and February show that Tesla’s sales are declining, and it is losing market share across nearly every region it operates in.

Long-Term Optimism vs. Present Struggles

Despite these near-term struggles, Tesla investors remain optimistic about the company’s future, largely due to the CEO’s frequent focus on long-term potential and how various business sectors could become multi-trillion-dollar industries. However, the falling revenue growth and operating margins are key concerns. While Tesla's margins have been relatively strong for an automaker, the car industry as a whole is known for having thin margins, and the same applies to airlines, which I consider even less attractive in terms of investment. Despite being one of the best-performing car companies globally, Tesla still faces challenges typical of the industry.

Increasing Costs

Tesla has been investing heavily in expanding its infrastructure, particularly in developing self-driving technology and other long-term innovations. These investments have required significant capital, and while they may pay off in the future, they are currently dragging on profits. The company is also spending large amounts on assets like AI and data centers, which, while promising, have yet to deliver substantial returns.

Declining Margins and Increased Incentives

Reduced Profit Margins: Tesla has been offering more incentives, such as price cuts, 0% financing, and free self-driving features, in an attempt to drive sales. However, even with these efforts, sales growth has been lackluster, forcing Tesla to absorb lower margins to maintain competitiveness. This has resulted in decreasing profit margins, which are a key factor affecting overall profitability.

Tesla's margins are now declining and showing signs of further deterioration. This is largely because the company has been forced to offer more incentives, such as free self-driving features, 0% financing, and price cuts, in an attempt to stimulate sales growth, which has been stagnant. Even with these incentives, sales are not growing as expected, and it seems that even more incentives will be needed to drive sales. This approach aligns with management's strategy of accepting lower margins in the short term to boost sales. The hope is that, in the future, they can leverage self-driving technology as an upgrade, offering high-margin software sales for cars already on the market.

Declining Cash Flow and Operational Strategy

Similar to its operating margins, Tesla’s cash flow from operations has also been declining, down by 15% over the most recent trailing 12-month period. However, one positive aspect of Tesla's business model is its direct-to-consumer approach, which allows the company to gather real-time data on customer demand. Unlike traditional dealerships, which often lead to overproduction and excess inventory, Tesla avoids the risk of having unsold cars sitting on dealership lots, which ties up cash. The direct model provides better insight into consumer demand and allows Tesla to avoid costly inventory issues.

Rising Total Assets with Flat Profits

One key issue that many investors are overlooking is the significant increase in Tesla's total assets. While its revenue and profits have remained relatively flat, Tesla's total assets have more than tripled from $40 billion to $122 billion between 2020 and now. This means the company is relying on more assets to generate the same amount of sales and cash flow, which is not an ideal situation. For comparison, imagine a restaurant that generates the same $1 million in profit, but one operates from a single location, while the other operates four locations. The latter is less efficient despite having the same profit. Similarly, Tesla’s increased asset base is not generating proportional returns, making it less attractive.

Expensive Investments with Limited Returns

Tesla has been investing heavily in assets like data centers and AI technology to develop self-driving capabilities. However, the significant increase in assets—around $82 billion since 2020—has yet to produce the expected incremental gains. The company is essentially using this extra capital just to stay competitive while funding the costly development of driverless car technology, which is still far from being ready. Tesla is still waiting to begin testing in June, and if testing hasn't even started yet, it could be quite some time before the technology is actually developed.

Development of Self-Driving Technology and High Costs

Tesla’s self-driving car technology still has a long way to go before it’s ready for widespread use on the roads and starts generating revenue and profits. It wouldn't be surprising if the company needs to invest an additional $10, $20, $30, $50, $100, or even $200 billion before the technology is fully developed and ready for large-scale deployment. Tesla's strategy of going vertically integrated, meaning they want to handle everything from app development to customer acquisition without external partnerships, makes this process significantly more expensive compared to companies that collaborate with partners and utilize existing resources.

Declining Return on Assets

Because Tesla has been pouring so much money into assets, the return on those assets has fallen to just 6.25%, and I wouldn't be surprised if it continues to decline over the next couple of years until, if ever, the company can start benefiting from its self-driving car investments. However, it's still unclear how much those benefits will be. The company's strategy has resulted in less efficient asset utilization, and the return on investment is diminishing as it continues to ramp up spending.

Valuation Concerns Despite Decline

Even after Tesla’s stock has declined by around 50%, it still appears expensive. With a price-to-free-cash-flow ratio of 228, Tesla remains significantly overpriced. On a forward price-to-earnings basis, it’s trading at 64, which still seems high. For comparison, Tesla is valued about 10 times more than other car companies, which means the market isn’t treating Tesla like a traditional car company. Furthermore, when compared to AI companies like Nvidia, Microsoft, and Alphabet, Tesla's valuation is two to three times higher, even though it has yet to achieve any meaningful AI-related revenue. Its stock price reflects potential future profits, not current realities, trading as if the development of self-driving cars and the revenue from that technology are already a sure thing, which is far from guaranteed.

Despite these declining profits, Tesla's stock continues to be valued at very high multiples. Even after a significant drop in share price, it remains expensive compared to other automakers and even some tech companies. This mismatch between high valuation and declining profitability raises questions about Tesla's ability to justify its stock price moving forward.

Discounted Cash Flow Model Update

In the beginning of my analysis, I mentioned updating my discounted cash flow model. I’ve revised the expected free cash flow projections for Tesla from 2029 to 2035 based on the progress the company has made with self-driving technology. However, I’m not assuming a 100% probability that Tesla will develop fully functional self-driving cars and generate billions in profit. I’m also not pricing it at a 0% probability. I’ve taken a more balanced view, considering both the potential upside and the risks, given Tesla’s past track record of not delivering on its promises.

Tesla Day Inventory

The Fanboy Delulu

Tesla fans often argue that the company is not just a traditional car manufacturer, but a tech and energy company. They emphasize that Tesla’s focus on electric vehicles (EVs), autonomous driving, and energy storage sets it apart from traditional automakers. According to this perspective, Tesla isn’t limited by the traditional constraints of the auto industry and is instead pioneering a new era of innovation in clean energy, software, and AI technology.

Tesla supporters also point to its vertically integrated business model, which allows it to control the entire process—from vehicle production to software development and even energy solutions like solar panels and batteries. For them, Tesla is more about transforming the future of transportation and energy rather than simply making cars. This broader vision is why they argue that Tesla's valuation should be viewed differently than that of a typical car manufacturer.

While these arguments highlight Tesla's unique position in the market, it doesn't change the fact that around 80% of its revenue still comes from car sales, meaning it remains heavily reliant on the automotive industry. Tesla’s status as a tech company may help it justify higher valuations, but it also faces the challenges of proving its technology, particularly with self-driving cars, which still haven't fully materialized.

Intrinsic Value and Stock Price Outlook

Previously, my intrinsic value estimate for Tesla stock was around $80-84 per share. After the adjustment, I’ve raised my intrinsic value estimate to $90-95, which still remains significantly below Tesla’s current market price of $234. So, to answer the question of whether Tesla stock is a buy at its current price, my answer is NO—I would not recommend buying Tesla stock at these levels.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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