Tesla is one of the most valuable companies in the world, but it has a lot to prove if it wants to live up to it.
If Elon Musk is to be believed, Tesla (TSLA 3.91%) is no longer an automaker, but an artificial intelligence (AI) and robotics company. Tesla currently has very little AI and robotics-related revenue, which makes it even more difficult to assess the stock’s potential and value.
Where is Tesla headed? Should investors buy the stock? Let’s break it down into its components.
Image source: Tesla.
The EV business is not what it used to be.
Tesla’s current business is primarily selling electric vehicles (EVs), with an adjacent energy storage business. This article combines these two businesses and treats them as one.
Subtracting the $5.9 billion gain from deferred tax assets recorded in the fourth quarter of 2024 reveals lower free cash flow and lower net income.
TSLA Net Margin (TTM) data by YCharts. TTM = trailing 12 months.
The reason why net income is decreasing is very simple. Tesla was able to raise prices and, in turn, margins during the pandemic, when the entire industry was in short supply, but has been forced to lower prices over the past two years. It shows up at low margins.
Margins have declined, and as you can see below, the EV maker’s stock now trades at a 30x price-to-earnings ratio, compared to GM (GM 1.56%) and Ford (F 1.15%). Sales ratio (P/S). And remember, Tesla’s deliveries and revenue are also down.
TSLA Operating Margin (TTM); data by YCharts.
Therefore, the market should place great value on AI and robotics.
AI and Tesla’s FSD Strategy
We know that Tesla has been selling Autopilot since 2014 and its fully self-driving (FSD) feature, or self-driving that requires human supervision, since 2020. What we don’t know is the adoption rate or margin of options. For now, it’s part of the automotive business.
Third-party estimates put the adoption rate at 2%, but Elon Musk said it was “much higher,” without providing details. Assuming a 5% adoption rate with annual sales of 2 million units, the current price of $99 per month could generate $120 million in additional revenue per year. That’s great, but not much changes for an $832 billion company.
FSD’s vision is to eventually enable fleets of self-driving cars. These vehicles will be owned by Tesla buyers, who will earn money by paying Tesla for the FSD and allowing their vehicles to be used as robotaxis.
The reality is that FSD currently cannot legally drive autonomous vehicles anywhere in the world, and it could be years before Tesla receives a license to operate any type of autonomous vehicle. There is. Even after that happens, the economics of this business model are unclear.
It’s clear the market likes the idea of robotaxis, but given that their FSD must currently be supervised and there is no path to full autonomy, how is there a clear path to cash flow? I don’t know.
Robot business
Robots are another part of the business that is very opaque. You are currently developing a humanoid robot, but how big is the market for it?
Once again, investors are being asked to place more value on products that don’t yet exist, with unclear market fit.
You can’t buy Tesla stock today.
Tesla currently trades at 9 times sales and 73 times earnings. Forward, the stock trades at 93 times analysts’ estimates for next year’s earnings.
That’s an incredibly high multiple to pay for a company with a declining core and very risky new products in AI and robotics.
I don’t think it’s worth the risk. Therefore, I think the stock is a sell today.
Travis Hoium holds a position at General Motors. The Motley Fool has a position in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: Long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
