Tesla (TSLA 3.06%) has emerged as one of the top-performing stocks in the market over the past five years, yet it remains a focal point of intense debate among investors. CEO Elon Musk has consistently been a controversial figure, recently gaining attention for his vocal support of the newly elected President Donald Trump, who has appointed him to lead the new Department of Government Efficiency. Following Trump’s election, Tesla’s stock has surged dramatically, climbing nearly 70%, which has positioned the company among the largest globally. As reported by the Motley Fool, as of January 6, Tesla was recognized as the eighth-largest company worldwide.
Tesla’s credentials in the automotive sector are well-established. The company stands as one of the largest manufacturers of electric vehicles (EVs) globally. Although it has recently been overtaken by China’s BYD, the competition between these two companies remains fierce for the top position in the market. Tesla’s value extends beyond merely being an EV manufacturer. Investors are optimistic about its groundbreaking autonomous technology, which includes innovations such as the recently launched Cybercab and its autonomous robot, Optimus. Although the timeline for the release of these products is still uncertain, Tesla has set its sights on starting production of the Cybercab by 2026.
With Tesla’s shares experiencing substantial growth following Trump’s election, it has solidified its status as one of the foremost companies globally. But the pressing question remains: is Tesla a worthy investment for 2025? In the following sections, we will explore the compelling arguments on both sides of the stock debate.
Image source: Tesla.
Why Investors Are Bullish on Tesla’s Future
Tesla has not only pioneered the electric vehicle market but has also established an unparalleled brand presence and ecosystem within the EV sector. It boasts the world’s largest fast-charging network, making it a preferred choice for consumers. Tesla’s product range spans from affordable models like the Model 3 to high-end vehicles such as the Model S, Model X, and the highly anticipated Cybertruck, unlike its competitor BYD, which focuses more on the budget segment of the market.
Furthermore, Tesla’s advancements in autonomous technology provide it with a significant competitive edge. Although Alphabet’s Waymo is widely regarded as the leader in autonomous vehicle technology and operates the largest active autonomous ridesharing network in the U.S., Tesla’s extensive fleet of vehicles can receive software updates for autonomous features like full self-driving, potentially giving it a decisive advantage in the race toward fully autonomous transportation.
Additionally, electric vehicles currently represent a small fraction of the overall automotive market, but the increasing public policy support and growing environmental awareness worldwide are likely to drive a significant shift toward EV adoption. This trend bodes well for Tesla’s long-term prospects, positioning it favorably as global demand for electric vehicles continues to rise.
Key Concerns Surrounding Tesla’s Business and Stock Performance
Despite the promising outlook for Tesla’s future, there are several cautionary factors that investors should carefully consider. First and foremost, the company’s recent financial results have raised red flags. Tesla wrapped up 2024 with a decline in vehicle sales, marking its first downturn in this area since 2011, which could indicate underlying challenges in maintaining growth.
In the third quarter, while overall revenue climbed 8% year over year thanks to significant gains in its energy and services segments, the automotive revenue only saw a modest increase of 2%, reaching $20 billion. Although Tesla has managed to enhance its profit margins, overcoming an earlier slump in profitability, the automotive sector is characterized by low gross margins, meaning that the company’s success remains closely tied to its revenue growth.
While Musk has projected a production volume increase of 20%-30% for 2025, Tesla has not consistently met Musk’s ambitious targets in the past. Moreover, there are legitimate concerns regarding demand within the EV market as growth rates in the U.S. are beginning to plateau. This trend suggests that the transition to electric vehicles may face more obstacles than previously anticipated, particularly with the Trump administration potentially phasing out the EV tax credit and favoring fossil fuel industries.
Furthermore, Tesla’s stock has become considerably expensive following its recent rally, trading at an astronomical price-to-earnings ratio of approximately 200 based on adjusted earnings. In contrast, most companies in the automotive sector typically have P/E ratios below 10. While Tesla certainly deserves a premium for its potential to disrupt the market with its innovations in autonomy and beyond, a P/E ratio of 200 for a company exhibiting nearly flat revenue growth is exceptionally rare and may indicate an inflated valuation.
Assessing the Investment Potential of Tesla for 2025
Tesla’s ambitious vision for achieving full autonomy could be unparalleled in the industry, but tangible progress appears to be years away. Meanwhile, the stock’s current valuation seems excessively high, even for a technology company, and the anticipated growth in electric vehicle demand that investors have been banking on appears to be faltering. Additionally, the Trump administration is poised to further complicate the landscape for the EV sector.
At this juncture, investing in Tesla stock seems to hinge on a belief in the company’s eventual success in achieving autonomy. However, the existing valuation suggests a significant risk of a price correction if the business fails to meet expectations. Given these substantial risks, many investors might find it prudent to steer clear of Tesla stock in 2025, at least until there are clearer indicators of progress in autonomy or a rationalization of its valuation.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.
