Analysts are downbeat on Tesla but investors are still buying

Times

12 hours ago

Pessimism towards Tesla has been rising on Wall Street. Analysts have steadily downgraded earnings estimates for the electric carmaker led and backed by Elon Musk since January, slashing profit forecasts for this year by almost a year.
A consumer backlash against Musk's political interventions in President Trump's administration, rising competition and a muted reception for its upgraded Model Y vehicle, which has compounded caution amid a slowdown in sales.
Yet investors seem undaunted. The stock may have fallen 31 per cent from a record peak of $480 in December, but is still 35 per cent higher than on November 4, the day before Trump's election, which represents an eye-watering 112 times forward earnings for next year, levels last seen during the 2021 post-pandemic boom in technology stocks.
• Investors in Musk's AI company undeterred by Trump clash
That also makes Tesla the best performing of all the 'magnificent seven' — which also includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia — which have returned an average of 5 per cent generated by the rest of the group.
'I'd encourage people to look beyond the bumps and potholes of the road immediately ahead of us,' Musk told Wall Street analysts as the company unveiled its first quarter results in April. 'Lift your gaze to the bright, shining citadel on a hill. That's where we're headed.'
The 'citadel' in question is Tesla's foray into robotics. The launch of Tesla's 'robotaxis' is anticipated this month in its home base of Texas. The unveiling of between ten and 20 self-driving Model Y cars will represent the first tangible step in efforts by Musk to pivot away from chasing EV sales, towards such technology. Its Cybercab is scheduled for 'volume production' next year, the company has said. By 2030, Tesla will be pumping out 'millions' of its Optimus humanoid robots, the Tesla boss said.
Musk, 53, has insisted that the company will have '90-something per cent' share of the robotaxi market, when it gets 'millions of cars' on the road next year.
The billionaire's desire to dominate the robotics industry is a familiar playbook among the tech titans, Philippe Houchois, an analyst at Jefferies said, but there is a logic to it given the inherent challenges in gaining supremacy over the car market.
'The problem is, the car industry existed long before Musk and however good it is, you cannot dominate the car industry,' he said.
However, competition is growing. Waymo, which is backed by Google's parent Alphabet, already claims to have more than 250,000 weekly rides across Phoenix, San Francisco, Los Angeles and Austin, through a partnership with Uber. Other rivals are also pushing ahead, like Wayve, a British start-up, Zoox, which is backed by Amazon, and China's Pony.ai.
Yet it is the EV business that is generating the cash needed to fund Tesla's great growth hopes. 'Any reality that we have is in a car business that is struggling,' Houchois said.
While Musk has been on stage wielding chainsaws and attending political rallies, Tesla sales have been sliding. Tesla unveiled its worst quarterly numbers since 2020 in April.
• Business live: Bank of England holds interest rates at 4.25%
The company is wrestling with rising competition from Chinese rivals like BYD, as well as traditional carmakers such as Volkswagen, which have launched hybrid and electric vehicles.
BYD, which is pressing ahead with overseas expansion, regained its title as the world's largest EV seller earlier this year and in April outsold Tesla in Europe for the first time, indicating that the Shenzhen-based group is challenging its American rival far beyond the borders of its home market.
Tesla had benefited from an early lead in ramping up its deliveries. 'But the gap is closing,' Houchois said, pointing towards Tesla's choice to prioritise spending on its more nascent technology over driving further scale in the EV market.
'A flaw in Elon Musk's thinking is that he may be right in not wanting to invest long-term in auto, as he thinks it's a losing proposition in terms of valuation, but Tesla should play the game and do the job of competing in autos until autonomy and robots deliver the next phase of growth,' he said.
The uncertainty caused by tariffs and the broader macroeconomic tumult prompted Tesla to pull guidance for a return to volume growth this year.
Price tags have continued to decline as Tesla attempts to stimulate demand, a trend that analysts expect to continue over the next few quarters, forecasting an average sales price of $38,300 by the first quarter of next year, down from $39,720, according to Factset data.
Sentiment towards Musk and his role in driving Tesla to a $1 trillion company is also complicated. While the boss has been instrumental in pushing the company forward, some analysts say that the company could still thrive without him.
'There are 120,000-plus good, hardworking people that are very smart at moving the company forward. [Musk] helps establish that vision, but they … bring the magic to life,' George Gianarikas, an analyst at Canaccord Genuity, said.
For Tesla to prove that it deserves its inflated valuation, a re-acceleration in sales growth and improvement in margins is required, analysts say. A changing macroeconomic backdrop could provide a natural boost. 'If rates come down a lot, it'll help with buying cars,' Gianarikas said. It will also need to maintain healthy cashflow to justify funnelling cash into its future bets.
Baillie Gifford, which made its name as an early backer of Tesla as well as other technology companies, has already sold down its holdings in the EV maker across its trusts since the end of last year.
'The challenge for us as long-term investors is, what do you do with the stock that has appreciated that much where there hasn't really been any fundamental driver of that news,' Tom Slater, manager of the Scottish Mortgage Investment Trust — which has reduced its holding to less than 1 per cent of its portfolio — told investors earlier this year.
Unless Musk can show Tesla is capable of regaining its sales momentum, more investors may follow the Scottish heavyweight's lead.