If one believes Elon Musk, Tesla (NASDAQ: TSLA) is more than just your typical automaker. According to Musk, it’s now an artificial intelligence (AI) and robotics company. This shift in perception makes evaluating the stock’s potential and value a challenging endeavor, especially considering the current lack of significant AI or robotics revenue streams at Tesla.
Image source: Tesla.
The Evolution of Tesla’s EV Business
At present, Tesla’s core business revolves around selling electric vehicles (EVs) coupled with an energy storage division. For the sake of this analysis, let’s consider these two sectors as one cohesive unit.
Analysis of Tesla’s financials indicates a decline in free cash flow and net income, particularly evident when excluding the $5.9 billion benefit from deferred tax assets recorded in the fourth quarter of 2024.
TSLA net income (TTM) data by YCharts; TTM = trailing 12 months.
The root cause of the declining net income figures is relatively straightforward. During the pandemic, Tesla managed to boost prices and, consequently, its profit margins. However, in the past two years, the company has been compelled to reduce prices, leading to a corresponding decline in margins.
Despite trading at a valuation 30 times higher based on its price-to-sales ratio (P/S) compared to GM (NYSE: GM) and Ford (NYSE: F), Tesla’s margins are now only marginally superior. Additionally, Tesla’s delivery numbers and revenue are also on a downward trajectory.
TSLA operating margin (TTM); data by YCharts.
It appears that the market is attributing substantial value to Tesla’s AI and robotics initiatives.
The Role of AI in Tesla’s Future
Tesla has offered Autopilot since 2014 and launched its Full Self-Driving (FSD) feature in 2020. Despite these developments, crucial aspects such as the adoption rate and the feature’s profit margins remain ambiguous and are currently embedded within the automotive business segment.
While third-party projections suggest a 2% adoption rate, Musk claims it is significantly higher without providing specifics. Even if we assume a 5% adoption rate on an annual sale of 2 million vehicles, this would translate to a mere $120 million in incremental revenue annually at the existing $99 monthly price point. However, this figure is relatively insignificant for an $832 billion corporation.
Tesla envisions FSD evolving into a network of autonomous vehicles owned by Tesla customers, who would pay for FSD and generate income by utilizing their vehicles as robotaxis.
Currently, FSD lacks the capability to autonomously operate a vehicle anywhere globally, and it may take several years before Tesla obtains the necessary permissions to deploy an autonomous fleet. Moreover, the business model’s economic viability remains uncertain.
While the market appears enthusiastic about the concept of robotaxis, the lack of a clear pathway to positive cash flow, especially given the current need for FSD supervision and absence of a definitive autonomy roadmap, is a concerning issue.
The Enigma of Tesla’s Robotics Business
The realm of robots represents another enigmatic aspect of Tesla’s operations. While a humanoid robot is in the developmental phase, the market demand for such a product remains unclear.
Investors are essentially asked to ascribe significant value to a product that is yet to materialize, with an indeterminate market fit.
Final Verdict: Proceed with Caution
Currently priced at 9 times sales and 73 times trailing earnings, Tesla is trading at a premium. Looking ahead, the stock is valued at 93 times the estimated earnings for the forthcoming year. This exorbitant valuation presents a high level of risk, given the company’s dwindling core operations alongside the precarious nature of its new ventures in AI and robotics.
Considering the associated risks, I am inclined to view Tesla’s stock as a “sell” proposition at the present juncture.
Is Tesla a Viable Investment at Present?
Prior to making any investment in Tesla, it is advisable to contemplate the following:
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Travis Hoium has holdings in General Motors. The Motley Fool maintains positions in and recommends Tesla. The Motley Fool advocates for General Motors and suggests long January 2025 $25 calls on General Motors. The Motley Fool adheres to a strict disclosure policy.