Tesla’s AI Ambitions Won’t Save Its Sinking EV Sales
Tesla’s market capitalization soared past $1 trillion in 2024, driven by optimism surrounding its artificial intelligence-powered full self-driving (FSD) technology. However, beneath the surface, the company’s electric vehicle (EV) sales are struggling. In 2024, Tesla reported its first annual decline in EV sales since the Model S launched in 2011. This downward trend is a significant concern, as EV sales still account for 79% of the company’s revenue.
A Shrinking Business with a Lofty Valuation
Tesla’s stock is currently trading at a price-to-earnings (P/E) ratio of 104, significantly higher than its tech peers. This valuation is difficult to justify, especially considering the company’s shrinking EV business. Even if investors believe in the potential of FSD and the Cybercab robotaxi, the latter isn’t scheduled for mass production until 2026. This means investors are paying a premium for Tesla stock in hopes of seeing meaningful FSD revenue that may not materialize for another two years.
Competition from Low-Cost Manufacturers
Tesla faces intense competition from low-cost EV manufacturers, particularly in China. Companies like BYD are selling EVs for under $10,000, making it challenging for Tesla to compete with its current pricing strategy. The lack of an affordable EV option could hinder Tesla’s ability to grow its sales in critical markets like China and Europe.
FSD Technology: A Double-Edged Sword
While FSD technology has the potential to transform Tesla’s economics, it also poses a significant challenge in the shorter term. The company’s focus on autonomous EVs may distract from its struggling EV business, which still accounts for the majority of its revenue. Furthermore, the regulatory environment will play a crucial role in the adoption of FSD technology, and any setbacks could negatively impact Tesla’s stock price.
A Steep Decline Ahead?
Given Tesla’s lofty valuation and shrinking EV business, a decline in its stock price is likely. The company’s market capitalization would need to fall by only 16% to drop out of the trillion-dollar club. However, a steeper decline is possible, especially if investors begin to question the company’s ability to justify its current valuation.
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