This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla (NASDAQ: TSLA) stock soared to a new record high in December, shortly after President Trump's election win. Investors are betting on friendlier regulations, which could help the company bring its full-self-driving (FSD) software to market much faster than previously expected, especially since CEO Elon Musk is currently serving as an advisor to the administration.
FSD has the potential to transform Tesla's economics, but that could still take years, even with an accelerated approval timeline (more on this later). In the meantime, the company is struggling with declining passenger electric-vehicle (EV) sales, which is where most of its revenue comes from right now.
That's part of the reason Tesla stock has fallen by around 27% from its recent record high. Here's why I predict it could plunge by another 50% over the next year or so.
Tesla's electric vehicle sales are shrinking
Up until the end of 2023, Musk consistently told investors that Tesla could grow its annual EV production by 50% per year, on average. The company delivered 1.8 million cars that year, which was a 38% increase, compared to 2022. It wasn't quite 50% but still a very strong result.
However, 2024 was a totally different story. EV deliveries shrank by 1%, compared to 2023, marking the first annual decline since Tesla launched the flagship Model S in 2011. The company is facing some grim realities, including a sharp increase in competition and softening demand for EVs overall as consumers weigh issues like depreciation and availability of charging infrastructure.
Simply put, it's impossible for Tesla to grow production by 50% per year if the cars aren't selling. Musk told investors he expects sales to rebound during 2025, with EV deliveries potentially growing by as much as 30%. However, the early signs are very troubling.
In January, Tesla's sales plunged by 63% year over year in France, almost 60% in Germany, 44% in Sweden, and 38% in Norway. Sales were even down by over 33% in Australia.
Here's the kicker: In Germany, sales of EVs overall actually increased by 53%, which implies Tesla is rapidly losing market share.
These challenges are likely to get worse as the year progresses, as more EVs come to market from low-cost manufacturers, like China-based BYD. It already sells its Seagull model for $10,000 in its domestic market and is expected to enter Europe this year.
FSD and a new $10 trillion opportunity
Tesla unveiled its Cybercab robotaxi last year, which will be powered by its FSD software. In fact, it won't even come with pedals or a steering wheel. Musk wants to build a ride-hailing network in which Cybercabs can haul passengers and even make commercial deliveries around the clock, creating a new, high-margin revenue stream for Tesla.
Cathie Wood's Ark Investment Management thinks autonomous ride-hailing could drive Tesla's annual revenue to over $1.2 trillion by 2029, representing a staggering 12-fold growth from its 2024 result of $97.6 billion. Other Wall Street analysts, like Dan Ives from Wedbush Securities, have also predicted that FSD will be a trillion-dollar opportunity for the company.
The Cybercab isn't scheduled to go into mass production until 2026, so those forecasts will take years to play out. That brings me to another long-term opportunity for Tesla — the Optimus humanoid robot — which Musk says will have a thousand times more use cases than a car.
Tesla plans to use several thousand Optimus robots inside its manufacturing facilities this year to complete repetitive and even dangerous tasks that human employees don't want to do. Given the versatility of humanoid robots, the potential customer base is almost limitless because they can be used in factories, households, and everything in between.
Plus, since Optimus is expected to sell for under $30,000, it will be extremely cheap, compared to the ongoing annual cost of a human worker. Its value proposition is obvious for businesses all over the world.
Musk thinks Optimus will generate $10 trillion worth of sales over the long term and even predicts robots will outnumber humans by the year 2040.
Tesla stock is wildly expensive, which could lead to a drop of 50% or more
Tesla generated $2.04 in earnings per share (EPS) during 2024, placing its stock at a price-to-earnings ratio (P/E) of 161. That's an eye-popping valuation, considering the Nasdaq 100 technology index — which is home to all of Tesla's big-tech peers — trades at a P/E of just 33.6.
It also makes Tesla three times more expensive than Nvidia stock, which trades at a P/E of 52.2. Nvidia will report its financial results for its fiscal year 2025 on February 26 and is expected to have grown its EPS by a whopping 126%. Tesla's EPS, on the other hand, plunged by 53% during 2024. Therefore, it's incredibly difficult to justify the enormous premium in Tesla's valuation right now.
TSLA PE Ratio data by YCharts.
With that said, Tesla stock has always traded at a premium valuation to the broader market. But in the past, it was supported by the incredible growth in the company's EV business. That's no longer the case.
EV sales still account for 78% of Tesla's total revenue, so the recent decline is a problem because the company's future potential growth drivers, like autonomous driving and the Optimus robot, aren't expected to scale up until after 2026. That means investors might have to brace for another year of weak earnings in 2025, which makes Tesla's current valuation even harder to stomach.
As I mentioned at the top, Tesla stock is down 27% from its all-time high already. But even if it plunged by another 50%, its P/E ratio would still be above 80. The stock would have to decline by 67% just to trade in line with Nvidia's P/E ratio, or 79% to trade in line with the P/E ratio of the Nasdaq 100. That's assuming the company's earnings don't fall even further, which is a real possibility.
As a result, I think significant downside is on the horizon for Tesla stock over the next year or so. If it does fall by another 50%, investors who believe in the potential of the Cybercab and Optimus might be faced with an attractive long-term buying opportunity.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
