Tesla(NASDAQ: TSLA) surpassed a $1 trillion valuation for the first time in October 2021. Its electric vehicle (EV) business was generating explosive growth, and investors were highly optimistic about the company's future.
But Tesla crashed out of the trillion-dollar club in 2022, when the S&P 500(SNPINDEX: ^GSPC) entered a bear market. Its stock still hasn't reclaimed its all-time high, because the company's EV sales growth is now slowing on the back of softening demand and fierce competition across the industry.
However, Tesla stock has soared 30% since former President Trump won reelection on Nov. 5. CEO Elon Musk played a big role in Trump's campaign, and it's possible Tesla will benefit from the new administration's business-friendly policies.
Tesla's valuation is finally back above $1 trillion. However, by one traditional valuation metric, its stock is now more expensive than all of its peers in the trillion-dollar club, including Nvidia. Here's why investors should be cautious about chasing the rally.
Tesla's core business is slowing
Tesla delivered 936,222 EVs in 2021, representing growth of 87% compared to the previous year. It then delivered 1.3 million cars in 2022, an increase of 40%, followed by 1.8 million cars in 2023, up 38%.
Do you notice a trend? Tesla's sales growth is slowing, and currently falling way short of Elon Musk's 50% annual goal. In fact, Tesla's 1.29 million deliveries through the first nine months of 2024 represented a 2.3% drop compared to the same period last year. That means the company is on track for an annual sales decline for the first time since it launched its flagship Model S in 2011.
Demand is softening across the EV industry right now. A report by Goldman Sachs suggests consumers are worried about the resale value of EVs and a lack of rapid-charging infrastructure. Plus, high interest rates and elevated living costs are pushing potential buyers toward cheaper gas-powered vehicles instead.
Tesla also faces growing competition, especially from low-cost manufacturers like China-based BYD. The BYD Seagull sells for under $10,000 in China, which is the world's biggest EV market, and Tesla simply can't compete at that price point. The Seagull could also enter Europe in 2025, which is another market where Tesla has a strong presence.
Musk thinks Tesla's EV deliveries could grow by 20% to 30% next year. However, he recently scrapped plans to build a low-cost vehicle to compete with the likes of BYD, so it's hard to see where that growth will come from.
Image source: Tesla.
Autonomous driving is Tesla's future
On Oct.10, Tesla unveiled its Cybercab robotaxi, which is designed to operate autonomously using the company's full self-driving (FSD) software -- the car doesn't even have pedals or a steering wheel. The Cybercab is forecast to enter mass production in 2026, but there's one problem: Unsupervised FSD isn't approved for use on American roads.
People who own Tesla's EVs have used beta versions of FSD to autonomously drive billions of miles in the real world, but they must stay ready to take the wheel at all times. Tesla's latest vehicle safety report for the third quarter of 2024 shows one crash for every 7 million miles driven using FSD, which makes it around 10 times safer than the average car on American roads (one crash per 700,000 miles).
That safety record should pave the way for regulatory approval eventually. After all, Alphabet's Waymo already provides a driverless ride-hailing service in Phoenix, Los Angeles, and San Francisco. Musk believes Tesla could operate a similar service in California and Texas by next year.
Cathie Wood's Ark Investment Management believes Tesla could generate a staggering $756 billion per year from autonomous ride-hailing by 2029 -- considering the company is on track to generate just $99 billion in total revenue from its existing businesses this year, that implies an incredible amount of growth.
Some analysts think President Trump's reelection will expedite the approval of Tesla's FSD and Cybercab platforms. Musk was a heavy supporter and financial backer of the Trump campaign, and this new administration will favor a lighter regulatory touch across the board.
Dan Ives from Wedbush Securities called Musk's support for Trump a "poker move for the ages," which he believes could be worth $1 trillion for Tesla's ambitions in autonomous driving.
Tesla stock is incredibly expensive right now
Tesla's stagnant EV sales -- combined with price cuts across the board to spur demand -- have led to a consistent drop in the company's earnings over the past year. The company generated $2.40 in earnings per share (EPS) over the last four quarters, a drop of 33.5% from the prior-year period.
Following its 30% surge since Nov. 5, Tesla stock is now trading at an eye-watering price-to-earnings (P/E) ratio of 133.8. That makes it the most expensive stock in the trillion-dollar club by a wide margin -- and almost twice as expensive as Nvidia:
NVDA PE Ratio data by YCharts
There is a key difference between Tesla and Nvidia. While Tesla is experiencing a decline in its earnings, Nvidia is generating explosive growth. In fact, Nvidia's EPS is on track to increase by a whopping 138% in fiscal 2025 (which ends in January), according to Wall Street's consensus forecast provided by Yahoo.
If Musk's guidance is accurate and the Cybercab enters mass production in 2026, investors likely have to endure at least another year of sluggish EV sales and potentially weak earnings. Even if the Trump administration helps Tesla fast-track the widespread release of FSD, the real revenue probably won't arrive until the company's ride-hailing network achieves scale through the Cybercab.
For that reason, it's very difficult to justify buying Tesla stock at its current valuation. Even if you believe in the future of autonomous driving, it might be best to wait for a steep pullback before investing.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends BYD Company and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
