Elon Musk’s Aspirations for Tesla: Reality or Fantasy?
Elon Musk is known for making audacious claims. Although some have materialized, many remain unfulfilled. Recently, he asserted that Tesla (NASDAQ: TSLA) has the potential to become the most valuable company globally, possibly exceeding the combined worth of the next five companies, which currently totals over $10 trillion, including heavyweights like Nvidia.
Tesla’s current market cap stands at just under $900 billion. Musk’s assertion implies that Tesla could increase nearly tenfold. Is this feasible, and should investors consider buying Tesla stock now? Let’s explore Musk’s claims in detail.
Challenges Facing Tesla’s Automotive Business
Tesla’s automotive division has hit a snag after years of growth. In the first quarter of this year, deliveries dropped 13% year-over-year to 337,000 units, as competitors gain traction globally. Consequently, automotive revenue fell 20% from the previous year. This decline is exacerbated by substantial price cuts to maintain market share.
Profit margins have diminished, now resting at 7.4% for the past year, posing a threat to Tesla’s earnings potential. If deliveries continue to fall alongside declining prices, maintaining operating margins could become increasingly difficult as the year progresses. The outlook is further dimmed by a lack of long-term guidance for 2025 and persistent sales declines in key markets such as China, Europe, and the United States.
Given the absence of any new models announced by management, it appears challenging for Tesla’s automotive business to improve facing the current landscape. While hopes hang on the new Cybertruck and advancements in autonomous vehicle technology, the reality remains uncertain. Competing companies, such as Waymo, are already conducting 250,000 rides weekly, whereas Tesla has yet to launch its robotaxi service.
Is it realistic for Tesla to attain a $10 trillion market cap under these circumstances? It seems increasingly improbable.
A person charging a Tesla.
The Promise of the Optimus Robot
Musk’s current optimism stems from the potential of the Tesla Optimus Robot, a humanoid project under development. He envisions a $10 trillion market for these robots, proposing that selling 100 million units at $100,000 each could be achievable. Remarkably, this is no small figure.
While the idea of generating $10 trillion in revenue is tantalizing, such claims lack a solid foundation. Tesla has yet to produce a functioning humanoid robot; demonstrations have utilized remote control. Anticipating demand for 1 million units annually—let alone 100 million—appears overly ambitious, given the limited pool of potential customers.
Musk can present as optimistic as he wishes, yet those figures do not necessarily align with economic realities.
TSLA PE Ratio data by YCharts
Market Realities for Investors
Investors are beginning to acknowledge a stark reality: Tesla stock has been overvalued for an extended period. Trading just under $300 at the start of 2021, it now hovers around $275, which still may not reflect its actual worth.
Currently, Tesla trades at a price-to-earnings (P/E) ratio of 150, while a conventional automotive stock averages closer to 10. As mentioned earlier, Tesla’s automotive revenues are declining by 20% annually, with uncertain future indicators.
Though management touts developments like the Cybercab and Optimus Bot, these ventures are not yet operational businesses. Even if they succeed, it doesn’t imply Tesla’s stock is a favorable investment at this time.
Musk’s prediction that Tesla could reach a market value ten times its current amount does not warrant immediate stock purchases. A deeper analysis reveals a struggling automotive company trading at a high P/E ratio. Caution is advisable regarding Tesla stock until more promising indicators arise.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Tesla. 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.
