Tesla AI Valuation Soars, Reality Check Needed?

Key Takeaway

• Tesla's valuation at 63 times forward earnings, surpassing AI giants Nvidia and Microsoft, reflects ambitious AI and autonomous driving expectations not grounded in current performance.
• Facing stiff competition in EVs and autonomy from companies like Volkswagen, BMW, BYD, and Huawei, Tesla's market dominance is increasingly challenged.
• Despite a recent stock rebound due to AI focus and China progress, financial strategies and broader EV options pose significant risks to Tesla's growth narrative.

Tesla's Market Valuation and AI Ambitions

Elon Musk's vision for Tesla Inc. extends beyond electric vehicles (EVs) to include pioneering self-driving technology. However, Tesla's current market valuation, significantly higher than AI leaders Nvidia Corp. and Microsoft Corp., reflects expectations of success in autonomous driving that may not align with current realities. Tesla trades at 63 times forward earnings, dwarfing Nvidia's 33 and Microsoft's 30, despite declining earnings estimates due to slowing EV demand. David Mazza, CEO at Roundhill Investments, notes the challenge in maintaining a growth narrative when the core business is declining. Tesla's stock experienced a rebound, rising over 24% following a quarterly earnings call that emphasized autonomous vehicles and AI, alongside news of progress in China's driver-assistance software approval.

Competition and Consumer Demand

Tesla faces stiff competition in both the EV and autonomous driving sectors. Other automakers, such as Volkswagen and BMW, report significant increases in electric vehicle sales, contrasting with Tesla's first quarterly sales decline since 2020. The company's ambitious project to launch a Robotaxi by August adds to the speculative nature of its valuation. Analysts express skepticism about Tesla's dominance in the self-driving market, with mixed reviews on its driver assistance software. Mark Hawtin from GAM Investments highlights the intense competition Tesla faces, especially in China, from companies like BYD and Huawei, which already offer technology for Level 2 autonomy.

Financial and Strategic Challenges

Tesla's aggressive pricing strategy has impacted the resale value of its vehicles, potentially leading to higher future leasing costs for consumers. This, combined with a broader range of EV options on the market, poses a demand challenge for Tesla. Analysts from Guggenheim and Piper Sandler express concerns over Tesla's growth trajectory and the necessity of further price cuts. Despite these challenges, Tesla's market capitalization remains substantial, driven by investor faith in Musk's vision. However, less than half of this valuation is now based on its auto business, with future growth potential accounting for a significant portion.

Street Views

• David Mazza, Roundhill Investments (Bearish on Tesla):

  "Musk has always wanted Tesla to be viewed as more than an EV maker, but that works when there is growth in the core business. When your core business is declining, that narrative is a lot harder, which is why I think the multiple right now is detached from reality, and the stock is not cheap despite coming down a lot this year."

• Toni Sacconaghi, Sanford C Bernstein (Neutral on Tesla's autonomous driving prospects):

  "Full self-driving may not be a winner-take-all market, and if it is, it is not clear that Tesla will win."