Tesla (TSLA 0.15%) shares are retreating following a post-election surge. As of this writing, they trade 17% off their all-time high from mid-December. And through the first four trading days of 2025, they fell almost 6%.
The world's top electric vehicle (EV) stock has still worked out incredibly well for shareholders, as it has soared 1,170% in the past five years (as of Jan. 8). But with its current market cap exceeding $1.2 trillion, is Tesla a company you should be buying right now?
Facing challenges
Tesla's rapid ascent in the past decade is mesmerizing, as the business disrupted the auto industry with its popular EV models. However, the landscape has shifted from a robust backdrop to now being much more difficult to operate in. Tesla is experiencing this firsthand.
Last year, the company delivered 1% fewer EVs than in 2023. On a trailing-12-month basis, this important metric has actually plateaued in the past five quarters. Demand in the EV market is still strong, to be fair. But it's definitely rising at a slower pace than in years prior. Inflationary pressures and higher interest rates might deserve some blame.
It's worth pointing out that incumbents are encroaching on Tesla's turf. Ford reported a 35% increase in EV units sold in 2024. And General Motors reported EV sales surged 125% last year.
This highlights just how competitive the industry is becoming. There are the legacy carmakers all getting in on the action. There are also strictly EV-focused companies giving Tesla a run for its money, most notably in China, where EVs represent about half of overall auto sales. That's a much higher proportion than here in the U.S.
Stiffer competition is directly having a negative impact on Tesla's financials, particularly its ability to improve profitability. When the EV market was less crowded, Tesla was able to consistently flex its pricing power. In Warren Buffett's mind, this key trait is indicative of a high-quality enterprise. However, Tesla has been forced to generally cut prices in recent years, in an effort to maintain market share. This could be a sign that the business's competitive standing is under pressure.
Paying up for an uncertain outcome
Tesla generated 91% of its overall revenue in Q4 from the sale of EVs and related services. Consequently, it's probably the right move to still view it as a car company, one that's facing headwinds at the moment.
To buy such a business, investors are being asked to pay a price-to-earnings (P/E) ratio of 109. That's an insanely high valuation for an auto manufacturer. For comparison's sake, the tech-heavy Nasdaq-100 Index trades at a P/E multiple of 32. And Nvidia, the hottest company on the face of the planet, can be purchased for a P/E ratio of 55. Tesla is truly trading with some lofty expectations.
That's because investors view the stock as a bet on what founder and CEO Elon Musk could do. Finally introducing unsupervised self-driving capabilities could allow Tesla to realize its ultimate goal of launching a global robotaxi service. There is also hope that the business can broadly commercialize its humanoid robot.
The success and wide adoption of autonomous tech and robotics isn't certain, though. There are regulatory and technical hurdles that must be cleared. What's more, humans have to be comfortable with all of this, particularly around the idea of giving up complete control of a car to a machine. The outcome is unknown, but the valuation reflects tremendous success.
Even before the stock's huge run-up following the election last November, I thought the shares were expensive. That makes today's setup even more of a red flag. Tesla is viewed quite favorably in the investment community. But I don't believe the stock is a smart buy.
