Tesla (TSLA) stock surged following Donald Trump’s re-election to the White House. Given Elon Musk’s support and backing for the now president-elect, Tesla was one of the main proponents of the so-called Trump Trade. However, with the stock currently trading at 100x forward earnings, I’m really struggling to justify the valuation multiples. Even with an ally in the White House, I’m bearish on Tesla.
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Tesla’s Friend in the White House
Tesla boss Musk contributed at least $130 million to Trump’s campaign efforts, making him one of the largest individual donors. So far, it’s turned out to be a pretty good investment for the businessman with his own Tesla shares surging $26 billion in value after the election. So, why did Musk back Trump and what can he get out of it?
Nothing is certain yet, but Trump has floated the idea of appointing Musk to a newly created government efficiency role. As such, the South African would have a meaningful role within the new administration and would likely have an influence on the direction of policies.
For Tesla, this alliance could prove crucial in shaping future automotive policies. Musk is expected to leverage his influence to push for favorable regulation for autonomous vehicles and Robotaxis that Tesla plans to develop.
Musk has also expressed his intention to advocate for a unified national strategy for regulating autonomous vehicles, which could streamline Tesla’s path to widespread deployment of self-driving technology.
Moreover, and according to reports, Musk likely wants to convince the National Highway Traffic Safety Administration (NHTSA) not to take enforcement actions against Tesla regarding the safety of existing driver-assistance systems, “Autopilot,” and “Full Self-Driving” (FSD).
Tesla’s Valuation and the Concerns Over Self-Driving
Tesla is a very expensive car stock, especially after this election-induced rally. At the time of writing, Tesla is trading at 100x forward earnings, but the company is only forecasted to grow earnings by 14.6% annually over the next three to five years. These forecasts may or may not include the self-driving Robotaxi, which remains something of an unknown.
It goes without saying that car companies, even EV companies, don’t trade at 100x forward earnings. Li Auto (LI) trades at 20.4x forward earnings, BYD (BYDDF) at 21x, and General Motors (GM) at 5.5x. Simply put, if we were valuing Tesla purely as an EV play, we could expect it to trade around 30x earnings, taking into account the premium that U.S. stocks tend to command over their Chinese peers.
And even at 30x earnings, the company’s price-to-earnings-to-growth (PEG) ratio would sit over two, making it expensive versus many of its peers and the wider consumer discretionary sector. However, at the current share price, the PEG ratio is 7.9.
As such, a vast proportion of the market valuation relates to the company’s prospects in self-driving vehicles, artificial intelligence (AI), and robotics. Unlike other AI-oriented companies, like Nvidia (NVDA), Tesla’s route to profiting from AI is less clear. For one, it appears to have fallen behind in self-driving capabilities.
Tesla Might be Playing Catch-Up
Tesla was once considered a frontrunner in autonomous driving technology, but it may now be playing catch-up in the Robotaxi race. While the company has made bold claims about its FSD capabilities, the recently unveiled Robotaxi won’t be seen on the roads anytime soon. Instead, competitors, both in the U.S. and China, are getting a head start.
Waymo, a subsidiary of Alphabet (GOOGL), has emerged as the leader in autonomous vehicle technology. It operates a fleet of nearly 800 self-driving vehicles in California and Phoenix, undertaking more than 150,000 rides per week. Meanwhile, Lyft (LYFT) has inked a deal with self-driving partners to bring non-Tesla Robotaxis to its app. Things are also moving fast in China.
In contrast, Tesla’s FSD system has faced scrutiny from regulators due to safety concerns and crashes. The NHTSA has launched investigations into Tesla’s autonomous driving technology, potentially leading to recalls.
Furthermore, Tesla’s repeated delays in delivering fully autonomous vehicles have eroded investor confidence. This gap between Tesla’s claims and actual progress has left many industry observers skeptical about the company’s ability to compete effectively in the burgeoning robotaxi market.
Buzz Around Tesla’s Optimus
Because of the above, I find it very hard to quantify exactly how much this self-driving opportunity is. According to Cathie Wood’s Ark, the opportunity could be worth $951 billion for Tesla alone by 2029, with a gross margin of 53%. This forecast appears increasingly farfetched.
However, moving away from driving, Musk has suggested that “Optimus will ultimately be the most valuable product. So I think it has a good chance of being the most valuable product ever made.”
Optimus is Tesla’s humanoid robot and Musk plans to start sales in 2026. The issue is that Tesla has a habit of overpromising and underdelivering. Personally, I haven’t seen enough of Optimus to get excited.
Is Tesla Stock a Buy, According to Analysts?
On TipRanks, TSLA comes in as a Hold based on 11 Buys, 16 Holds, and eight Sell ratings assigned by analysts in the past three months. The average TSLA stock price target is $207.83, implying 35.3% downside potential.
The Bottom Line on Tesla Stock
I don’t doubt that Tesla has a huge amount of potential. However, I am equally concerned that this potential is overplayed, as indicated by the enormous multiples at which the company trades. Regardless of Musk’s optimism, at 100x forward earnings and with a PEG ratio of 7.9, Tesla stock looks like a very risky investment. The average share price target confirms that many other analysts feel the same.
