President Donald Trump’s tariff orders hit electric vehicle (EV) giant Tesla TSLA shares hard. The stock was one of the worst performers in the S&P 500 yesterday. Shares of the company fell 5% yesterday, more than its Mag 7 peers. With Trump announcing 25% tariffs on goods imported from Mexico and Canada and 10% tariffs on Chinese imports, things aren’t looking up.
Tesla produces a huge chunk of its cars in China, and the imposition of tariffs is set to hurt the company. The company’s chief financial officer, Vaibhav Taneja, acknowledged that. On the lastearnings call he said, “Over the years, we’ve tried to localize our supply chain in every market, but we are still reliant on parts from across the world for all our businesses. Imposition of tariffs would have an impact on our business and profitability.”
Now, with Trump actually imposing the tariffs, the cost of vehicles is expected to rise and affordability issues could weigh on demand. If Tesla absorbs additional costs, it will further strain its already squeezing margins. Either way, these tariffs will put pressure on Tesla.
Amid this backdrop, investors might be wondering what to do with TSLA shares. Does yesterday’s 5% drop signal a buying opportunity or the start of something worse? Let’s dive into Tesla’s performance and fundamentals to see if now’s the time to jump in.
TSLA’s EV Business is Not Going Great
For a long time till the beginning of last year, Tesla forecast 50% annual growth in vehicle deliveries for the foreseeable future. But with slower-than-expected EV adoption, increasing competition and macro headwinds, the company withdrew this ambitious goal. For 2024, TSLA anticipated a modest delivery growth. But even after huge year-end incentives to fuel sales, the company couldn’t meet its target. In fact, Tesla’s annual deliveries contracted for the first time ever in 2024.
Generous incentives and cheap financing to boost sales weighed on the company’s automotive margins. Automotive gross margin (including regulatory credits) came in at 15.9% in the fourth quarter of 2024, down from 18.3% reported in fourth-quarter 2023 and missed our forecast of 18.4%. TSLA missed both earnings and revenue estimates in the last reported quarter.
Tesla, Inc. Price, Consensus and EPS Surprise
Tesla, Inc. price-consensus-eps-surprise-chart | Tesla, Inc. Quote
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While Tesla expects its vehicle business to return to growth in 2025, he seems to have withdrawn his earlier vehicle growth target of 20-30% for 2025. The market remains challenging and tariffs are only going to make things difficult for Tesla.
Cybertruck demand is also cooling off and Tesla has started offering big discounts on the same. Discounts range up to $1,600 for new Cybertrucks, depending on the configuration, and up to $2,600 for demo versions of the trucks in inventory.
As far as affordable EVs are concerned, the company is on track to launch one in the first half of 2025 and expand its lineup from there. However, Musk didn’t share any new details on pricing, size, or specs on the latestearnings call With TSLA’s EV sales declining and affordability a growing concern, let’s hope the company sticks to its timeline and delivers as promised.
Musk’s Ultra-Bold AI Promises Won’t Help Much
While Musk had little to say about Tesla’s core EV business, he certainly made some bold claims on the latestearnings call He believes Tesla won’t just be the most valuable company in the world, it could surpass the combined worth of the top five — Apple AAPL, Microsoft MSFT, NVIDIA NVDA, Alphabet GOOGL, and Amazon AMZN. Talk about shooting for the stars!
And what’s behind this optimism? Artificial intelligence (AI), autonomous vehicles (AVs), and the Optimus robot. Musk even predicts Optimus could generate $10 trillion in long-term revenues. Let’s just take a moment to process that.
Of course, all these claims look too far-fetched. But that’s Musk for you! He has a history of making tall promises for the company, especially when times are challenging, in a bid to regain investors' faith and ignite excitement about Tesla’s future. But, betting on Tesla based on these claims would be premature and speculative.
It’s a “Prove it” Year for Tesla
Musk said, “2025 really is a pivotal year for Tesla. And when we look back on 2025 and the launch of unsupervised full self-driving, true real-world AI that actually works, I think we may regard it as the biggest year in Tesla history, maybe even bigger than Atlas car, or the Model S or the Model 3 or Model Y. In fact, I think it probably will be viewed '25 as maybe the most important year in Tesla's history.”
Such bold claims indeed make 2025 a pivotal year for Tesla or, rather, a prove-it year. The company is pushing forward with its robotaxi ambitions, aiming to launch unsupervised Full Self-Driving (FSD) as a paid service in Austin this June. It rolled out FSD Version 13 in December and already has vehicles operating autonomously at its Fremont factory, with Texas next in line. If all goes to plan, unsupervised FSD could expand to several U.S. regions, including Texas and California, by year-end—pending regulatory approvals.
Let’s hope Tesla delivers because if it doesn’t, regaining investor confidence will be tough, and Musk’s bold words will be even easier to take with a pinch of salt.
Not All is Gloom and Doom for TSLA
What’s working great for Tesla is its energy generation and storage business. It has been a standout performer, with revenues growing at a triple-digit compound annual growth rate over the past three years. This segment, which includes products like the Megapack, boasts the highest margins among Tesla’s business units.
In the fourth quarter of 2024, the company deployed 11.0 GWh of energy storage products, up a whopping 243% year over year. Full-year deployments in 2024 jumped to 31.4 GWh from 14.7 GWh in 2023. Musk expects deployments in 2025 to increase another 50% at least. The ramp-up of the Megapack factory to meet soaring demand positions Tesla to capitalize on the global energy transition.
Tesla Shares Too Pricey
From a valuation perspective, Tesla looks overvalued. Based on its price/sales ratio, the company is trading at a forward sales multiple of 10.77, higher than its 5-year average. TSLA has a Value Score of F.
Image Source: Zacks Investment Research
What Should Investors Do With TSLA?
Tesla is facing near-term headwinds, and Musk remains fixated on its long-term potential, making it too early to bet on his vision. Quoting Musk, “If somebody doesn’t believe that Tesla will solve autonomy, I think they should not be an investor in the company.”
While autonomous driving and robotaxi ambitions could eventually transform Tesla’s economics, the real test is whether the company can actually deliver this year. Meaningful revenues from AI and AVs are still years away, and let’s not forget Tesla’s history of delays and missed deadlines.
Tesla’s financial performance will depend almost entirely on its core EV business for at least the next 12 months. And with the EV landscape uncertain given affordability issues, tariffs and high competition, the company’s lofty valuation becomes even harder to justify.
Analysts are also losing confidence in the stock, as seen in the declining estimate revisions.
Image Source: Zacks Investment Research
Given the current circumstances, we think Tesla is best avoided for now. The stock carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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