Tesla (TSLA) stock has given back some of its gains in recent weeks but continues to trade with huge valuation multiples. The only explanation for its premium trading is Tesla’s potential to dominate the autonomous vehicle era. Personally, I’m neutral on Tesla as I believe the stock’s valuation is hard to justify, but autonomous driving could be massive for the firm. However, with growing competition in autonomous cars as well as electric vehicles, it is a big “could be.”
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Tesla’s Setbacks
As I’m holding on to a neutral sentiment, it would be remiss not to start by looking at Tesla’s recent setbacks. The company, which typically trades at high multiples due to CEO Elon Musk’s promises of self-driving electric vehicles and a breakthrough in robotics, is facing some challenges.
Perhaps most important is managing investors’ expectations regarding its autonomous vehicles. After disappointing earnings in April, Musk took to X to promise the unveiling of the long-awaited Robotaxi in August.
We now know that Musk was indeed overpromising, and the unveiling has been pushed back to October. This delay has been attributed to ongoing design changes and the need for further refinement of the vehicle’s autonomous capabilities, as well as regulatory considerations.
Moreover, another setback occurred in August when Tesla announced a recall of approximately 9,100 Model X SUVs in the U.S. due to roof trim pieces that could detach while driving. It’s not the first time Tesla’s build quality has come into question, which could potentially impact consumer confidence. However, as someone who took delivery of a Model Y in August, clearly, it didn’t bother me.
Rising Competition
As I’ll discuss the autonomous opportunity more in the next section, it’s worth noting that Tesla has been overtaken by BMW (BMWYY) in European electric vehicle (EV) sales for the first time. In July 2024, BMW sold more fully electric cars than Tesla. This marks a shift in the competitive landscape and a win for legacy car manufacturers. Moreover, BYD, the Chinese car manufacturer, has also surpassed Tesla in global EV sales, including plug-in hybrids, adding further pressure on the company.
Is Tesla Taking a Backseat on Autonomy?
The growing pressure from industry rivals continues when we discuss autonomous cars. Tesla appears to have received another setback amid increasing competition from Waymo and General Motors (GM) Cruise.
Waymo, formerly the Google Self-Driving Car Project, announced in August that it had recently achieved 100,000 autonomous trips per week, double the volume reported in May. This progress is attributed to deliberate scaling and cost optimization, enhancing the consumer experience. Waymo’s sixth-generation robotaxi is developed by Geely’s ZEEKR (ZK).
Likewise, in August, Uber (UBER) announced a strategic partnership with General Motors Cruise to integrate autonomous vehicles into its ride-sharing platform. Meanwhile, Baidu (BIDU) managed 75,000 rides per week in Q2. These are genuine steps forward from Tesla’s competitors.
Nonetheless, and perhaps unsurprisingly, some industry players, analysts, and institutions still support Tesla. Nvidia (NVDA) CEO Jensen Huang has previously said that Tesla is “far ahead” of the pack when it comes to autonomy, and unsurprisingly, Ark Invest (ARKK) remains bullish.
Ark Invest analysts argue that Tesla’s use of data sets it apart. Ark analysts reported that Tesla trains its autonomous system with 70x more data than its peers. In addition, Tesla’s approach relies solely on cameras and AI-driven software, potentially allowing for lower costs and simpler hardware.
Can We Justify Tesla’s Valuation?
If I’m honest, this uncertainty doesn’t instill me too much confidence in Tesla’s ability to dominate the autonomous cars industry. One might suggest that the stock would be priced cheaper with this level of uncertainty. That’s not the case. Tesla remains extremely expensive when we use near-term metrics like the price-to-earnings (P/E) ratio. The stock is trading at 89.4x TTM earnings and 87.8x forward earnings.
Moreover, growth expectations aren’t phenomenal, and they need to be pretty special to justify this P/E ratio. According to analysts, Tesla’s earnings per share (EPS) are only expected to grow at a CAGR of 10.7% over the next three to five years. In turn, this results in one of the highest price-to-earnings-to-growth (PEG) ratios I’ve encountered in the ‘growth segment’ — the PEG ratio is 8.16.
Is Tesla Stock a Buy According to Analysts?
On TipRanks, TSLA stock is rated a Hold based on 10 Buys, 14 Hold, and nine Sell ratings assigned by analysts in the past three months. The average Tesla stock price target is $211.46, implying a 2.78% upside potential.
The Bottom Line on Tesla Stock?
Tesla stock doesn’t look attractive when we look at the company’s valuation metrics and consensus growth trajectory. There have been several setbacks in recent months, especially on the autonomy front, where other companies appear to be getting the upper hand. However, the promise and positivity relating to Tesla’s autonomous offer remain. Personally, I’m not taking a risk on the stock at the current price. So, I remain neutral on TSLA stock until further proof of clear progress in its autonomous cars is presented.
