Tesla's Stock Price Halved: End of an Overvalued Myth, or Dawn of a Self-Driving Revolution?

Tesla's Stock Price Halved: End of an Overvalued Myth, or Dawn of a Self-Driving Revolution?On March 11th, Reuters reported that Tesla's stock price plummeted nearly 50% in three months, sparking intense debate among investors about its valuation. Notably, Musk has a long-standing tense relationship with Reuters, recently denouncing it on social media as the "second biggest news hoax

Tesla's Stock Price Halved: End of an Overvalued Myth, or Dawn of a Self-Driving Revolution?

On March 11th, Reuters reported that Tesla's stock price plummeted nearly 50% in three months, sparking intense debate among investors about its valuation. Notably, Musk has a long-standing tense relationship with Reuters, recently denouncing it on social media as the "second biggest news hoax." Since hitting a record high of $1.5 trillion on December 17th, Tesla's market capitalization has evaporated by 45%, erasing much of the gains made after Musk's support of Donald Trump's presidential campaign. Even after this significant drop, Tesla's valuation, measured by traditional financial metrics, still vastly surpasses that of top global automotive and technology companies. This is largely because most investors and analysts have bought into Musk's marketing strategy: Tesla is not a traditional automaker, but an AI pioneer poised to revolutionize the industry with robotaxis and humanoid robots.

A Reuters survey of analyst reports from over a dozen banks and investment firms revealed that while Tesla's electric vehicle (EV) business accounts for almost all its revenue, it represents less than a quarter of its market capitalization. Tesla's valuation primarily rests on its yet-to-be-realized self-driving vision, despite Musk's annual promises since 2016 that fully autonomous Teslas are "coming next year."

Since December, Tesla's recent stock decline has been attributed to several factors: declining sales and profits; public backlash over Musk's political activities (such as serving as a senior advisor to Trump and significantly reducing the size of US government employment); and investor concerns that his political involvement is distracting him from the core business. Even so, Tesla's market cap remains approximately $65 billion higher than it was during the US presidential election, exceeding even the total market cap of General Motors. Recently, UBS lowered its first-quarter delivery expectations for Tesla; the following Monday, the company's stock plunged over 15%, wiping out over $125 billion in market value. This sell-off coincided with market panic over tariffs and recession fears, with the Nasdaq falling 4% and the S&P 500 dropping 2.7%. As of last Friday's close, Tesla's total market capitalization still stood at a staggering $845 billion, exceeding the combined market value of the next nine largest global automakers. These companies sold approximately 44 million vehicles last year, far surpassing Tesla's 1.8 million.

For a long time, investors have bet on Musk's futuristic vision rather than Tesla's current performance. However, as the gap between actual performance and analysts' expectations for unreleased products widens, some institutions are issuing warnings of an "irrational exuberance." In January, following Tesla's dismal earnings and its first-ever annual sales decline, JPMorgan analyst Ryan Brinkman questioned, "How long can this disconnect between stock price and fundamentals persist?" Tesla and Musk did not respond to requests for comment. Last July, Musk stated that if investors didn't believe Tesla could "solve self-driving," they should "sell their Tesla stock."

Robotaxis: Can Tesla Deliver on its Promises?

Tesla's previous market cap peak (over $1.2 trillion) in 2021 was fueled by soaring sales of its disruptive Model 3 and Model Y, proving the profitability of mass-market EVs. At that time, Musk pledged that Tesla would introduce cheaper EVs and achieve 20 million annual sales by 2030, almost double the sales of current global leader Toyota. However, he abandoned this target last year. Reuters reported in April 2023 that Tesla had canceled the much-anticipated $25,000 Model 2, shifting its focus heavily towards its robotaxi program.

This strategic shift resonated strongly in the market: despite stagnant EV sales and declining profits, Tesla's stock soared 71% between April and November 2022 during the US election. Then, in the weeks following Trump's election victory, Tesla's stock price nearly doubled. Musk spent over $250 million supporting Trump's campaign and currently serves as a senior advisor to him on deregulation and personnel reductions within government organizations. Bullish analysts believe Musk's political influence will help Tesla overcome regulatory hurdles. However, most US states currently have relatively lax regulations on autonomous driving, and Texas, where Musk has promised to launch commercial robotaxis in June, has prohibited municipalities from regulating them.

GLJ Research, an investment advisory firm, recommends shorting Tesla. Its CEO, Gordon Johnson, argues, "He could release the self-driving technology today, no problem." However, Johnson believes the technology is not roadworthy: "If released tomorrow, the jig is up, and these cars will be causing accidents all over the US." Tesla's Autopilot and Full Self-Driving (FSD) systems have been involved in lawsuits and federal investigations due to fatal accidents. The company consistently reminds consumers that these systems do not enable fully autonomous driving and require constant driver attention. Yet, Musk maintains that Tesla's technology will soon be safer than human driving.

Declining Sales, Increased Competition: Tesla Faces Serious Challenges

Tesla's core EV business is facing headwinds. Since launching the Model Y in 2020, the company has only released one new vehicle, the Cybertruck. This angular electric pickup truck sold only 38,965 units last year, far below Musk's initial prediction of 250,000 units by 2025. Furthermore, Tesla has repeatedly cut prices on its aging Model 3/Yespecially amid slowing global EV demand and intensifying competition, particularly in the Chinese market (where EVs start below $10,000). Recent data shows a significant decline in Tesla's European sales this year.

Ironically, the US president Musk supported might also hinder Tesla. Tesla, which benefited from EV subsidies, now faces the potential impact of Trump's proposed elimination of such policies. The president, a frequent critic of EV policies, has suggested scrapping the support measures that contributed billions of dollars in profits to Tesla. Musk has downplayed the impact of reduced subsidies, claiming competitors will be more severely affected.

Still Staggeringly High Valuation: Where's the Investor Confidence?

Despite the pressure on performance, Tesla's stock remains elevated. Its price-to-earnings ratio vastly surpasses industry averages, exceeding the average of the next 25 largest global automakers by a factor of nine and Chinese EV maker BYD by four times. While BYD's 2024 vehicle sales are expected to reach 4.2 million, more than double Tesla's, its market cap is less than one-sixth of Tesla's. Tesla's forward P/E ratio is two to three times higher than that of the most valuable global tech companies (Nvidia, Apple, etc.).

The Bull Case: Can Future Visions Justify High Valuation?

Bulls argue that traditional financial metrics fail to capture Tesla's potential, believing Musk possesses a unique ability to lead a transportation revolution. Musk has stated that robotaxis and humanoid robots will make Tesla "by far the most valuable company globally." Brian Mulberry, a portfolio manager at Zacks Investment Management, a Tesla investor, believes that despite concerns about Musk's "mad scientist" personality, he consistently delivers technological breakthroughs.

Most analyst models reviewed by Reuters remain bullish on Tesla. These models typically break down Tesla's valuation into several components: the automotive business (90% of total revenue, including charging services); energy generation and storage (10% of total revenue); and three emerging businesses: robotaxis, autonomous driving tech licensing/subscription services, and the Optimus humanoid robot. All three models reviewed in January showed relatively small contributions from EV sales to Tesla's future growth.

Truist Securities attributes 9% of Tesla's market cap to vehicle sales, 21% to autonomous driving services, 17% to robotaxis, and 34% to the robotics business. Bank of America's model attributes roughly half of Tesla's market cap to robotaxis and 28% to autonomous driving software subscriptions; Morgan Stanley's model attributes 21% to robotaxis and 39% to subscriptions for autonomous driving technology and other services.

Ark Investment Management, a Tesla investor, projects a $2,600 Tesla stock price by 2029, with robotaxis accounting for 88% of the company's market cap. Ark projects Tesla could produce millions of robotaxis by then, generating approximately $760 billion in annual revenuesurpassing even Walmart's global revenue. Tasha Keeney, Ark's director of research and investment strategy, believes Tesla will displace human drivers by dramatically reducing per-mile operating costs. "It will be cheaper than owning a car," she says, "and people might eventually give up driving altogether."

Tesla's Technology "Unable to Operate Safely"?

Trump Could Clear the Path for Driverless Cars Without Steering Wheels or Pedals