Tesla Faces Major Challenges as Stock Prices Fluctuate

Tesla (NASDAQ: TSLA) shares reached a record high in December, coinciding with President Trump’s election victory. Investors are optimistic about potential regulatory benefits that could help expedite the rollout of the company’s full-self-driving (FSD) software. CEO Elon Musk’s role as an advisor to the administration has further fueled this optimism.

While FSD could significantly impact Tesla’s financial model, actual implementation is likely many years away. Currently, Tesla is grappling with a downturn in passenger electric-vehicle (EV) sales—which account for the majority of its revenue.

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This declining trend has contributed to a 31% drop in Tesla’s stock price from its recent peak. Here’s why I believe the stock could further decline by 50% in the coming year.

Image source: Tesla.

Shrinking Electric Vehicle (EV) Sales

Up until late 2023, Musk had confidently assured investors that Tesla would achieve an annual EV production increase of 50%. In 2023, Tesla delivered 1.8 million cars, marking a 38% rise compared to 2022, though it fell short of the 50% goal.

Contrary to this growth, 2024 has seen a troubling trend. EV deliveries contracted by 1% compared to the previous year, marking Tesla’s first annual decline since it launched its flagship Model S in 2011. Heightened competition and a cooling demand for EVs, as buyers reconsider issues such as depreciation and charging options, have contributed to this decline.

Musk has suggested that sales may bounce back in 2025, estimating potential deliveries to grow by up to 30%. However, early indications are concerning. In January, Tesla’s sales plummeted by 63% in France, nearly 60% in Germany, 44% in Sweden, and 38% in Norway. Australia saw a decrease of more than 33% as well.

The situation in Germany is particularly telling: overall EV sales in the country rose by 53%, suggesting Tesla is losing ground in a competitive market. This trend could continue as more budget-friendly models, such as China-based BYD‘s Seagull, which retails for around $10,000, become available in Europe.

Exploring Full-Self-Driving and the $10 Trillion Market

Last year, Tesla introduced its Cybercab robotaxi, an innovative vehicle based entirely on FSD technology, featuring no pedals or steering wheel. Musk envisions a ride-hailing service where Cybercabs can provide passenger transport and commercial delivery around the clock, thus diversifying Tesla’s revenue streams.

Ark Investment Management, led by Cathie Wood, forecasts that autonomous ride-hailing could push Tesla’s revenue to over $1.2 trillion by 2029, a remarkable 12-fold increase from the projected $97.6 billion in 2024. Dan Ives from Wedbush Securities echoes a similar sentiment, anticipating FSD could create a trillion-dollar opportunity for the company.

However, mass production of Cybercabs won’t begin until 2026, meaning these projections will take time to become reality. Tesla is also pursuing a long-term opportunity with its Optimus humanoid robot, which Musk claims will have vastly more applications than vehicles.

This year, Tesla plans to deploy thousands of Optimus robots in its factories to handle repetitive and hazardous tasks, highlighting their potential versatility in various settings, from factories to households.

With a price tag expected to be below $30,000, Optimus presents a compelling value for businesses compared to ongoing labor costs. Musk anticipates that Optimus could eventually generate $10 trillion in sales, predicting that robots may outnumber humans by 2040.

Tesla Stock Valuation Raises Concerns

In 2024, Tesla posted earnings of $2.04 per share (EPS), resulting in a staggering price-to-earnings ratio (P/E) of 161. This valuation is particularly striking when compared to the Nasdaq 100, which has a P/E of just 33.6.

Moreover, Tesla is now three times more expensive than Nvidia, which has a P/E ratio of 52.2 and is expected to report a 126% EPS growth for its fiscal year 2025. In contrast, Tesla saw its EPS drop by 53% in 2024, making its current valuation particularly hard to justify.

TSLA PE Ratio data by YCharts.

Tesla has historically commanded a premium valuation, sustained by robust growth. However, with EV sales—representing 78% of revenue—declining, the outlook appears bleak. Growth from FSD and the Optimus robot may not materialize until after 2026, leading to another year of disappointing earnings in 2025. This context makes the current valuation even harder for investors to endure.

Currently, Tesla’s stock has already dropped 31% from its all-time high. A further plunge of 50% would still leave its P/E ratio above 80. To align with Nvidia’s P/E, the stock would need a 67% decline, and a 79% drop would be required for it to match the Nasdaq 100’s P/E ratio—again, assuming no further deterioration in earnings, which remains a possibility.

In summary, I foresee a substantial decline for Tesla stock in the next year. If the stock drops by another 50%, it may present a long-term investment opportunity for those who are optimistic about the Cybercab and Optimus.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.