Tesla (NASDAQ: TSLA) stock has experienced a sharp pullback recently. Currently, it’s trading about 30% below its all-time highs (set late last year).
Is now the time to consider buying the growth stock? Let’s discuss.
Two sides of the business
When I look at Tesla from an investment perspective, I always see two distinct parts of the business. First, there’s the electric vehicle (EV) side of the company, which is generating revenues and profits now. Then, there’s all the future stuff – full self-driving vehicles, robotaxis, artificial intelligence (AI), humanoid robots, etc.
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Now, I’m really not that excited about the EV side of the business. Because ultimately, it’s struggling at the moment.
For example, in January, Tesla’s year-on-year EV sales fell 63% in France, 60% in Germany, 44% in Sweden, and 8% in the UK. This weakness can be attributed to several factors including lower consumer demand, more competition from rivals (nearly all major auto manufacturers have slick new EVs now), a lack of new models, problems with vehicles (Tesla has recently made product recalls), and dislike for CEO Elon Musk.
However, I am quite excited about all the future technology. When I think about Tesla’s robotaxis and humanoid robots, there appears to be a lot of potential (even if a lot of it is a long way away).
For example, if the company can crack full self-driving technology (FSD) and is able to roll out fleets of robotaxis, it could enjoy a whole new growth trajectory. It’s the same with humanoid robots (Tesla has already developed the Optimus robot but this is still years away from a commercial rollout).
What’s it worth?
The question is, how much should investors pay for all this future potential?
Currently, Tesla trades on a forward-looking price-to-earnings (P/E) ratio of about 122 using the 2025 earnings per share forecast. That’s a really high valuation.
To put that earnings multiple in perspective, Nvidia – which is spearheading the AI revolution with its high-powered chips – currently trades on a forward-looking P/E ratio of about 30. So, Tesla is about four times as expensive as Nvidia (which many investors think is pricey).
Now, I could probably justify a P/E ratio of 50 (maybe 60) for Tesla given its significant growth potential. But a ratio of 122 doesn’t make a lot of sense to me.
Because there are quite a few risks to consider here. For example, what if robotaxis don’t actually come to fruition anytime soon? Or what if Elon Musk is really distracted by his work with the Department of Government Efficiency (DOGE). Alternatively, what if Musk leaves Tesla to focus on xAI or SpaceX?
Given the sky-high valuation, I don’t see Tesla as a great investment for me or other investors today. To my mind, it’s just too risky at current levels.
Of course, if the stock continues to fall there could be an opportunity to consider. But it would have to be trading at a much lower valuation for me to be bullish.
