Tesla Faces Challenges Amid Declining Sales and Overvaluation

Tesla (NASDAQ: TSLA) experienced a remarkable 63% surge in stock value last year, achieving an all-time high in December following President Trump’s election victory. Investors speculated that a more favorable regulatory environment could accelerate Tesla’s advancements in autonomous driving and humanoid robotics technologies, which some analysts suggest could evolve into trillion-dollar markets.

CEO Elon Musk is optimistic about Tesla’s trajectory, claiming it has a chance to become the world’s most valuable company. He envisions it even surpassing the combined worth of the current five largest companies—Apple, Microsoft, Nvidia, Amazon, and Alphabet, which together total $13.4 trillion.

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However, Tesla’s stock is currently on a downward trend, having dropped 44% from its recent peak. There are doubts about its potential to become the most valuable company, leading me to predict a possible further decline of up to 50% in its value.

Image source: Tesla.

Core Business Faces Unprecedented Challenges

Despite the promising potential of its future technologies, **79% of Tesla’s revenue** still derives from passenger electric vehicle (EV) sales. Once a pioneer with minimal competition in the EV market, Tesla is now grappling with increasing rivals that are impacting its sales significantly.

Until late 2023, Musk projected a **50% annual growth** rate in vehicle production. However, deliveries only inched up by **38%** that year, and reports indicate a **1% decline** in 2024. If demand is lacking, production capacity cannot grow, suggesting 2025 may be an even tougher year for Tesla.

Sales figures tell a bleak story. In January, Tesla’s sales plummeted more than **50%** in Europe, including an alarming **60%** drop in Germany, where the overall EV market saw a **53% increase**—indicating Tesla’s significant loss of market share. The downturn extended to other regions, with Tesla’s sales down **33%** in Australia.

February continued this trend, with Tesla’s sales reducing by **48%** in Norway—one of Europe’s leading EV markets. Other countries like France, Sweden, and Denmark reported declines of **26%**, **42%**, and **53%**, respectively. As of now, Tesla is anticipating another challenging sales month in Europe, with a staggering **71%** drop in vehicle sales in Australia since last February.

Consumers are increasingly favoring budget-friendly EVs, such as China’s BYD, which offers models like the Seagull at under $10,000. In January, BYD sold **twice as many** cars in China than Tesla, which used to be a stronghold for the company. With BYD eyeing further expansion in Europe, Tesla’s struggle to maintain market relevance intensifies due to fierce price competition.

Musk’s Focus Shifts to Autonomous Driving and Robotics

Musk’s foresight leads him to champion products like Tesla’s full self-driving (FSD) software and the Optimus humanoid robot, which he believes have market potentials vastly exceeding those of EVs. Rather than competing in a price war, Musk is shifting the company’s focus toward these future innovations.

Though FSD is not yet approved for autonomous use in the U.S., Musk anticipates it could be operational in Texas and California this year. The software is currently sold to Tesla EV owners, but the major opportunity lies in the forthcoming Cybercab robotaxi service. FSD would power this service, generating around-the-clock revenue by transporting passengers and facilitating commercial deliveries.

Wedbush Securities analyst Dan Ives estimates that FSD could potentially add **$1 trillion** to Tesla’s market capitalization over time. Considering Tesla is currently valued at **$830 billion**, this could more than double its worth. Ark Investment Management, led by Cathie Wood, is even more bullish, suggesting Tesla could achieve **$756 billion** in annual revenue from its autonomous ride-hailing business by **2029**, leading to an astounding **$8 trillion** valuation.

Nevertheless, with Tesla reporting less than **$100 billion** in total revenue in 2024, the prospect of a nascent segment achieving such financial heights in five years appears implausible, warranting skepticism towards Ark’s predictions.

Musk believes the Optimus robot might be Tesla’s most lucrative opportunity. In a January call with investors, he claimed the humanoid robot could eventually generate **$10 trillion** in sales due to its versatile applications. His vision posits that humanoids could outnumber humans by **2040**, integrating into every sector, including businesses, factories, and even households.

Concerns Over Tesla’s Stock Valuation

Tesla’s earnings per share (EPS) dropped **53% to $2.04** in 2024. This decline stemmed from waning EV sales and price cuts across most models to stimulate demand, which, in turn, hurt profit margins.

Despite a **44%** decline from its peak value, Tesla still trades at a staggering price-to-earnings (P/E) ratio of **128.6**, making it significantly pricier than industry giants like Apple, Microsoft, Nvidia, Amazon, and Alphabet:

Data by YCharts. PE Ratio = price-to-earnings ratio.

For Tesla to surpass the combined value of the five leading companies, as Musk predicts, its stock would need to rise **1,500%** from current trading levels. Given its elevated P/E ratio and declining earnings, this scenario seems unlikely in the near term.

Additionally, products such as the Cybercab and Optimus robot aren’t expected to enter mass production until **2026** or later, necessitating that Tesla relies on its passenger EV sales to sustain its business operations in the interim.