tesla (TSLA 8.22%) The stock price rose 70% during 2024, and the company’s market capitalization exceeded $1 trillion. But stocks actually spent most of the year in the red, and didn’t pick up momentum until Donald Trump won the presidential election in November.
Tesla CEO Elon Musk has poured money and influence into the Trump campaign, and investors hope the company will benefit from deregulation under the incoming administration and build fully autonomous vehicles powered by artificial intelligence. We speculate that this will be useful for the early realization of FSD technology.
FSD has the potential to transform Tesla’s economics, but the company faces serious challenges in the short term. The company’s electric vehicle (EV) sales will decline in 2024, marking the first annual decline since Tesla launched the Model S in 2011.
This is a problem because Tesla stock is undoubtedly overvalued at the moment, and it’s very difficult to justify its current valuation as its EV business shrinks. This is why I think stocks will fall in 2025 and fall out of the $1 trillion club.
Image source: Tesla.
Musk says EV deliveries will increase in 2025, but what will happen?
Last week (January 2), Tesla reported production and delivery numbers for the fourth (and final) quarter of 2024. The number of electric vehicles delivered to customers was 495,570, lower than Wall Street’s consensus estimate of 504,770. The company’s total annual deliveries were 1.79 million units, down 1.1% from 2023.
Even though Tesla’s stock price soared last year thanks to the potential of its FSD technology, EV sales still account for 79% of the company’s revenue. So if this part of the business isn’t doing well, it’s hard to justify further increases in the stock price (more on this later).
Musk recently told investors that EV shipments could increase by 20% to 30% in 2025, but also said he would halt production plans for new, lower-cost models. In recent weeks, conflicting reports have surfaced suggesting that Tesla plans to launch an affordable electric vehicle called the Model Q later this year, alongside a cheaper version of its popular Model Y.
Tesla may have a hard time increasing sales without selling entry-level EVs as competition from low-cost manufacturers increases in countries such as China. For example, BYD sells an electric vehicle called the Seagull in China for less than $10,000, and it is likely to arrive in Europe in 2025. China and Europe are important markets for Tesla, and the cheapest EVs currently cost around $30,000, so it can’t compete.
It’s all about full self-driving, but meaningful revenue could be years away
The reason Musk wants to scrap plans for low-cost EVs is because he wants Tesla to focus instead on self-driving EVs like the new CyberCab robotaxi. It was announced in October last year and is scheduled to go into mass production in 2026.
The Cybercab runs entirely on Tesla’s FSD software, so it doesn’t even come with pedals or a steering wheel. Tesla passenger EV owners can already use FSD in beta mode, but the company expects it to be approved for full unsupervised use in California and Texas this year. That’s why having a friendly regulatory system in the U.S. may be so valuable to Tesla.
Tesla intends to build its own ride-hailing network, allowing its Cybercabs to make money by ferrying passengers 24 hours a day — think Uber, except without a human driver. Additionally, consumers can purchase CyberCabs for personal use or to run their own self-driving ride-hailing services using Tesla’s network.
Simply put, fully self-driving technology will create several new ways for Tesla to make money. Cathie Wood’s Ark Investment Management estimates the company will generate $1.2 trillion in annual revenue by 2029, with FSD and CyberCab accounting for 63% of that total. Dan Ives, another top Wall Street analyst, also predicts that FSD will become a $1 trillion opportunity over time.
Tesla’s valuation is extremely high, making it a big risk for investors.
The main reason Tesla stock could fall this year is its high valuation, which cannot be justified given the current business conditions.
The company has achieved earnings per share (EPS) of $3.65 over the past four quarters, with a price-to-earnings ratio (P/E) of 104. It’s significantly more expensive than other tech stocks valued at $1. Over trillion — except for Broadcom, which is not a consistently profitable company (so its P/E ratio is skewed).
AVGO PE Ratio Data by YCharts
Remember, Tesla’s EV deliveries are declining in 2024, and when a business is shrinking, it’s usually natural to see a lower P/E ratio, not a higher P/E ratio. And even if investors believe in products like FSDs and robotaxis, mass production of the CyberCab isn’t scheduled until 2026.
That means investors are paying a huge premium for Tesla stock in anticipation of meaningful FSD income that may not be available for another two years. In reality, 2025 will probably be similar to 2024. This means that a large part of Tesla’s finances will depend on EV sales.
Tesla’s market cap currently stands at $1.2 trillion, so a drop of just 16% would knock it out of the $1 trillion club. I think there is a possibility of an even steeper decline this year. For example, for Nvidia to trade in line with its P/E ratio, the stock would have to fall 47%, which would result in a market cap of about $630 billion.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Anthony Di Pigio has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Uber Technologies. The Motley Fool recommends BYD Company and Broadcom and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
