With Q1 2025 results now parked for Tesla (TSLA), Musk’s baby seems to be in a state of flux and reinvention. With car deliveries falling, margins slipping, and profits evaporating, many investors may think twice about their bullish sentiments. However, not all is lost.
In a research note published on Tuesday, Morgan Stanley analyst Adam Jonas came to the defence of the beleaguered giant, highlighting Tesla’s strategic positioning in the evolving manufacturing landscape and emergent position as a leader in a “new industrial era.” Jonas maintained his Buy rating on Tesla and set a price target of $410.
So too with TSLA’s management. The firm’s commander-in-chief, Elon Musk, is as confident as ever that its best days lie ahead, with the eventual primary growth engine, namely AI, set to take on a greater burden. I’m not blind to the risks tied to the core operation, especially amid controversies and issues plaguing investors, but as we’ve seen time and again in the market, Tesla always seems to find a way through.
Therefore, I’m maintaining a Hold rating on the stock, encouraging investors to understand the business thoroughly while monitoring the stock’s valuation. TSLA is currently the epitome of a buy-the-dip stock and is in the middle of a particularly extensive one.
Tesla’s Evolving Strategy
Most people (including stock investors) still consider Tesla to be a car company. A car company with big ideas, big budgets and a CEO with a big ego. However, this is becoming less the case with each quarter. I’m bullish on TSLA’s prospects as a combination play of AI, energy, and robotics, with EVs serving as the bread and butter for a far more elaborate morsel.
Of course, no such reinvention is done without enormous challenges, but with the potential for massive margins in these futuristic areas that will dominate tomorrow’s world, investors shouldn’t pull the plug after a few quarterly speed bumps.
Market Dynamics Force TSLA’s Hand
When it comes to the tech giant’s latest figures, published in late April, TSLA reported a 9% revenue drop over the past year, with automotive revenue declining by 20%. That’s quite a hit considering the EV mania sweeping the world. TSLA’s operating margins did stay positive at 2.1%, but this is arguably a meagre result given the potential.
Investors should be cognizant that downs and ups can happen in a cyclical market. As a case in point, TSLA suffered a 13% drop in deliveries due to retooling requirements in its global production chain for the new Model Y. Obviously, such moves have a huge financial impact, but they also show that the market is forcing Tesla to move away from scaling deliveries; the company has no choice but to become a platform provider across energy, AI, and robotics.
The narrative in recent earnings calls surrounds growth in these new areas, far more than selling just vehicles. Although the risks of execution across all areas are high, the Full Self-Driving (FSD) rollout shows that it can be done, even if it takes time. With Tesla now planning on launching the first robotaxi pilot service in June, investors are going to be paying close attention on how the firm lays the groundwork for further adoption, and most importantly, further high-margin income.
Alongside this pivotal moment for FSD, Tesla management remains focused on robotics, with the Optimus humanoid robot potentially deployed internally this year. Success in this area would obviously redefine automation and manufacturing, but is far from an easy move, and with plenty of competition also vying for top spot. I’d say the energy business also deserves more attention from the market, with Megapack deployments now at a new record, and with a purpose build factory in Shanghai now close to operational.
All of Tesla’s areas of work link directly to the AI world to some degree, and with the company’s Dojo supercomputer and custom-built AI training chips, it is able to harness an enormous amount of data from these operations. Whether utilising vehicle or traffic data in FSD or energy and manufacturing data from robotics deployment, there is a clear plan in play here, and the rewards for the victor are likely to be enormous.
Heavy Risks Remain for Tesla Investors
While many alongside me will be bullish on the future of many of these technologies, I’d be remiss to not discuss the vast range of issues that may keep more cautious investors clear. Q1 clearly showed that the company has a decent number of structural weaknesses, mostly attributed to an evolving strategy, but uncertainty and short-term worries matter. Where the automotive business is slowing, the competition is ramping up significantly, especially in China’s BYD (BYDDF), which can now roll out models cheaper and faster than Tesla.
Sticking to vehicle deliveries, the most recent product, the Cybertruck, is about as divisive as it gets. While it appears technologically impressive, production for this somewhat unique product remains limited and expensive. In a recent earnings call, TSLA’s management noted that it was not clear when the range would meaningfully contribute to the top line, so as meaningful revenue streams narrow, many investors will be wondering if the peak of Tesla enthusiasm is now behind us.
Further risks emerge from the “Technoking” himself, Elon Musk. With Musk’s time already divided between Tesla, SpaceX, Neuralink, The Boring Company, X, and now the government’s DOGE programme, plenty of investors have voiced concerns about whether there is time for an enormous strategic pivot.
Bear in mind that these developments are occurring amid intense geopolitical and regulatory uncertainty, as Trump-era tariffs hit multiple sectors and cloud the entire market with doubt. Despite the volatile sentiment, TSLA stock maintains a solid position among a peloton of peers.
Tesla’s Valuation Dilemma
Most Tesla investors over the last decade will have heard the argument that the stock is overvalued and that the drop back to reality was inevitable. Plenty of controversies and surprises over the years have sent the share price into freefall, but just as many have sent it to record highs.
Share valuation has always been a divisive issue, with enormous potential and hype baked into the price before this became a reality. Still, it has often been justified over the longer term. This has been especially dangerous as the company transitions from being considered a traditional car company to a tech company.
With the P/E now at 151, investors are treating the firm as an established software provider, but these areas are still a relatively small part of the balance sheet. Until the market solidifies what it considers the company to be and the balance sheet aligns with this, I feel the valuation is in a precarious position.
Is Tesla a Buy, Hold, or Sell?
Wall Street analysts seem to agree. TSLA stock carries a Hold consensus rating based on 16 Buy, 10 Hold, and 11 Sell ratings over the past three months. TSLA’s average price target of $284.23 implies approximately 1% downside potential over the next twelve months.
No Shortage of Vision, but Uncertainty Persists
Tesla is undoubtedly one of the most important and ambitious companies out there, and it is deeply involved in pivotal sectors underpinning society as a whole. However, ambition doesn’t always translate directly into the balance sheet, at least in the short term.
Investors will need plenty of patience and a strong stomach to ride out the next few quarters. There may be some softness in the numbers, and volatility will be as present as ever, but those who believe in the company’s vision and leadership’s ability to execute will know the script by now. For now, I’m keeping a Hold rating until I see the numbers catch up with the strength of the ambition, but I will be glued to the Tesla story as it develops.