Elon Musk recently showcased Tesla’s (TSLA) Cybercab as the company ramps up its efforts to put autonomous vehicles on the road. While Cybercabs aren’t projected to hit the streets until 2026 as a best case scenario, they have tremendous potential. Other companies are also pivoting toward automated taxis, but few of them have the same clout as Tesla and its founder. Musk’s success with Tesla and other endeavors is encouraging, but the current status of TSLA stock makes me neutral on an investment in this name.
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Assessing the Cybercab Opportunity
A fleet of Tesla robotaxis could help Musk’s company take market share away from ride hailing giants like Uber (UBER) and Lyft (LYFT). Such a scenario could add billions of dollars to Tesla’s annual top-line that may eventually translate into respectable margins. However, it would be easier to feel bullish about Tesla stock if we had more tangible information regarding the robotaxi plan, as opposed to relying so much on speculation. I’m therefore neutral on TSLA.
The future for the Robotaxi initiative involves plenty of questions and uncertainty. Investors can look at Uber and Lyft to gauge the market size of autonomous vehicles, but it’s also worth noting that there are other competitors out there. Waymo, Cruise, and Zoox are some of the other firms that are producing autonomous vehicles.
Vehicle owners could potentially opt to rent out their Tesla Cybercabs, similar to what we see at Turo, the $2.7 billion privately owned peer-to-peer car rental marketplace. Tesla could drive more demand for this industry and end up with a large slice of the pie if Cybercabs become mainstream.
Tesla Stock Valuation Isn’t Attractive
Tesla stock isn’t terribly appealing when you look at its valuation, and that’s enough to make me neutral instead of bullish. Shares are down by 12% year-to-date, which includes a recent 9% slump following the robotaxi event. Investors were expecting more from Tesla, and many sold their shares in the aftermath. Even after the drop, TSLA stock trades at a lofty trailing GAAP P/E ratio of 61x. Meanwhile, a company like Ford (F) trades at an 11x P/E ratio.
Tesla bulls may not care much for this comparison, but both companies have exhibited low-single-digit revenue growth over the past few quarters. Profit margins have also been tight, with Tesla and Ford reporting net profit margins of 5.8% and 3.8%, respectively, during their most recent quarters. Ford achieved higher year-over-year revenue growth than Tesla in the most recent quarter.
While it’s possible for automobile stocks to have high P/E ratios, that’s usually reserved for luxury brands with high revenue growth and profit margins. For instance, Ferrari (RACE) has a 54x P/E ratio, but the company also reported 16.2% year-over-year revenue growth in the second quarter. Ferrari also closed out the quarter with a 24% year-over-year improvement in net income, resulting in a 24.1% net profit margin. Tesla isn’t reporting the growth rates or profit margins as Ferrari, and yet Tesla currently has the higher valuation.
Automobile Revenue Is Declining
Robotaxis present an opportunity to flip the switch and ignite growth, but it can’t seem to come soon enough. Tesla reported a 7% year-over-year decline in total automotive revenues in the second quarter.
While energy generation and storage revenue doubled year-over-year with other segments also performing well, most of Tesla’s revenue comes from its automobiles. The company generated $25.5 billion in total revenue, with 78% of that attributed to automobiles. I also believe that Tesla will face more pressure in the EV industry as Chinese competitors gain market share. The company may have to keep prices low to remain competitive, but that will put more pressure on margins in the process.
If automobile sales remain sluggish, it will be very difficult for Tesla to report meaningful revenue growth in future quarters. Investors may eventually lose their patience and sell their shares after a few more quarters of low growth.
Is it Wise to Bet on Musk?
There has been an Elon Musk premium priced into Tesla stock for a long time. Musk’s role in the company likely lends some investors more faith than they’d otherwise have. While TSLA stock doesn’t look like a buying opportunity to me, it’s hard to bet against Musk in the long run. Tesla led the way in electric vehicles, and Musk has also launched several exciting other enterprises, such as SpaceX and xAI.
SpaceX became the first private company to launch and return a spacecraft from orbit. Furthermore, Musk demonstrated that Twitter, now known as X, could still function after trimming 80% of its staff. Musk is one of the best entrepreneurs of this generation, but that’s still not enough to convince me to buy Tesla stock. It may be worth keeping TSLA on a watchlist while waiting for a big dip or significant additional robotaxi news.
Do Analysts Rate Tesla a Buy?
Tesla is currently rated as a Hold at TipRanks based on the assessments of 35 Wall Street analysts. Tesla stock has 11 Buy ratings, 16 Hold ratings, and 8 Sell ratings from the street. The average TSLA price target of $207.83 is about 6% lower than the recent market price.
The Bottom Line on Tesla Stock
Tesla’s automobile sales growth has stalled, and competition is heating up. Robotaxis may present a compelling long-term opportunity, but it could take several years for that segment to gain traction.
Elon Musk’s role as Tesla’s CEO is one of the main reasons that the stock has such a high valuation. Some investors remain very optimistic, despite decelerating sales growth rates. Investors would be encouraged to monitor Tesla stock for a more attractive price point, or to wait for more meaningful progress in robotaxis. However, the full development of that segment will likely take multiple years. That’s a good reason for caution, in my estimation.
I rate TSLA stock as neutral.
