Tesla(NASDAQ: TSLA) stock rose by 70% during 2024, catapulting the corporate to a market capitalization of greater than $1 trillion. However the stock actually spent a lot of the 12 months trading within the red — it didn’t gather momentum until Donald Trump won the presidential election in November.
Tesla CEO Elon Musk put his money and influence behind the Trump campaign, and investors are speculating the corporate will profit from lighter regulations under the incoming administration, which could help fast-track its artificial intelligence-powered full self-driving (FSD) technology.
FSD has the potential to rework Tesla’s economics, but the corporate faces a serious challenge within the shorter term. Its electric vehicle (EV) sales shrank in 2024, the primary annual decline since Tesla launched the Model S in 2011.
That is an issue because Tesla stock is definitely expensive without delay, and its current valuation could be very difficult to justify while its EV business is shrinking. Here’s why I feel the stock will decline in 2025 and drop out of the trillion-dollar club.
Image source: Tesla.
Last week (on Jan. 2), Tesla reported its production and delivery numbers for the fourth and final quarter of 2024. It delivered 495,570 electric vehicles to customers, which was below Wall Street’s consensus forecast of 504,770. It took the corporate’s total deliveries for the 12 months to 1.79 million, down 1.1% from 2023.
Although Tesla stock soared last 12 months due to potential of its FSD technology, EV sales still account for 79% of the corporate’s revenue. Subsequently, if this a part of its business is not performing, it becomes hard to justify further upside in its stock price (more on that later).
Musk recently told investors EV deliveries could grow by 20% to 30% in 2025, but at the identical time, he said he was canceling plans to provide a recent low-cost model. Conflicting media reports emerged over the previous couple of weeks that suggest Tesla is now planning to launch a reasonable EV called the Model Q sometime this 12 months, alongside a less expensive variant of its popular Model Y.
Tesla might struggle to grow its sales without selling entry-level EVs, because competition is surging from low-cost manufacturers in countries like China. BYD, for instance, sells an EV called the Seagull for lower than $10,000 in China, and it’s prone to enter Europe during 2025. China and Europe are critical markets for Tesla, and since its least expensive EV is currently priced at around $30,000, it simply cannot compete.
The rationale Musk desired to scrap plans for a low-cost EV is because he wants Tesla to deal with autonomous EVs as a substitute, like its recent Cybercab robotaxi. It was unveiled in October last 12 months, and it’ll enter mass production sometime in 2026.
The Cybercab won’t include pedals or perhaps a steering wheel, because it’ll run entirely on Tesla’s FSD software. Owners of Tesla’s passenger EVs can already use FSD in beta mode, but the corporate hopes it’ll be approved for full unsupervised use in California and Texas this 12 months. That is why having a friendly regulatory regime within the U.S. may very well be so worthwhile to Tesla.
Tesla intends to construct its own ride-hailing network so the Cybercab can earn revenue across the clock by hauling passengers — think Uber except without human drivers. Plus, consumers will have the ability to purchase the Cybercab for private use, or they should purchase a fleet of them to run an autonomous ride-hailing service of their very own using Tesla’s network.
Simply put, full self-driving technology will create several recent ways for Tesla to earn revenue. Cathie Wood’s Ark Investment Management estimates the corporate will generate $1.2 trillion in annual revenue by 2029, with FSD and the Cybercab accounting for 63% of that total. One other top Wall Street analyst, Dan Ives, also predicts FSD will develop into a $1 trillion opportunity over time.
The first reason Tesla stock could decline this 12 months is due to its lofty valuation, which is not justifiable based on the present state of its business.
The corporate delivered $3.65 in earnings per share (EPS) during the last 4 quarters, placing its stock at a price-to-earnings (P/E) ratio of 104. It’s significantly dearer than every other tech stock with a valuation of $1 trillion or more — aside from Broadcom, which is not a consistently profitable company (so its P/E ratio is skewed):
Remember, Tesla’s EV deliveries declined in 2024, and a shrinking business normally warrants a lower P/E ratio, not a better one. And even when investors consider in products like FSD and the robotaxi, the Cybercab is not scheduled for mass production until 2026.
Which means investors are paying an enormous premium for Tesla stock within the hope of seeing meaningful FSD revenue that may not come for an additional two years. In point of fact, 2025 will probably be just like 2024, meaning the vast majority of Tesla’s financial results will hinge on EV sales.
Tesla’s market capitalization is currently $1.2 trillion, so it only has to fall by 16% to drop out of the trillion-dollar club. I feel a good steeper decline is likely to be possible this 12 months. The stock would must fall by 47% only for its P/E ratio to trade in step with Nvidia‘s P/E ratio, for instance, which might end in a market cap of around $630 billion.
When our analyst team has a stock tip, it could possibly pay to listen. In spite of everything, Stock Advisor’s total average return is 903% — a market-crushing outperformance in comparison with 173% for the S&P 500.*
They only revealed what they consider are the 10 best stocks for investors to purchase without delay… and Tesla made the list — but there are 9 other stocks you might be overlooking.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’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 Idiot’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Uber Technologies. The Motley Idiot recommends BYD Company and Broadcom and recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
