Tesla's 10X P/S Premium: Is the Stock a Buy, Hold or Sell Now?

Globe and Mail

13 hours ago

Tesla TSLA is one of those stocks whose valuation has long been divorced from its fundamentals. It has always traded at a premium, backed by promises of its long-term potential. For years, that premium felt somewhat justified. Tesla didn't just sell cars — it transformed the electric vehicle (EV) space, much like Amazon reshaped retail and Netflix disrupted entertainment. For many, Tesla was the first name that came to mind when talking about EVs.
But that first-mover advantage is fading. Competition is fierce. Tesla's lineup looks dated, with no major launches lately. Meanwhile, legacy automakers, EV startups and especially Chinese rivals are flooding the market with more affordable and increasingly attractive options.
Having said that, Tesla has bold ambitions — from robotaxis to full autonomy — and it hopes these will become the next growth engine as EV sales momentum slows. But progress on that front has been slower than expected.
So, are there really enough tailwinds to support Tesla's sky-high valuation? The stock trades at more than 10X forward 12-month sales, far above the industry average of 2.68X. At this point, should investors bet on Tesla's long-term vision, or do today's headwinds make it too risky? Let's dig in.
TSLA's Weak Q2: Deliveries, Sales, Margins and FCF Slide
Tesla's financials continue to weaken, with declining deliveries, revenues, margins and cash flow.
After its first-ever annual delivery decline in 2024, 2025 is off to a rough start. Deliveries fell 13% year over year in the first quarter, followed by another 13.4% drop in the second quarter. China's EV giant China's BYD Co Ltd BYDDY continues to challenge Tesla. In the fourth quarter of 2023, BYD briefly took the EV sales crown from Tesla before ending the full year just behind. The same pattern was repeated in 2024. In first-quarter 2025, BYD delivered over 416,000 BEVs, outpacing Tesla's 336,000. In the second quarter, BYD reported 606,993 BEVs sold (up 42.5% year over year), marking its third straight quarter of beating Tesla in battery EV sales.
The last reported quarter marked Tesla's sharpest quarterly revenue decline in more than a decade, raising questions not only about demand but also about the company's brand image amid Elon Musk's increasingly polarizing political activity. Automotive revenues, Tesla's largest contributor, led the slide due to fewer deliveries and lower average selling prices. Model 3/Y deliveries fell 11.5%, while higher-end models (Model X/S) plunged roughly 52%, highlighting soft demand across the lineup.
Profitability also came under pressure. Automotive gross margin contracted to 17%, down 100 basis points from last year. Operating margin shrank to just 4.1%, a steep 220 basis point drop. Notably, while operating expenses fell only 1%, revenues contracted 12%, underscoring weaker efficiency.
Earnings and cash generation mirrored this trend. EPS fell 23% year over year, while operating cash flow dropped 30%. With capex up 5%, free cash flow tumbled 89% to just $146 million — its third straight quarterly slide.
Musk has already warned of 'rough quarters' ahead, and second-quarter results show exactly why investors should take him at his word.
Are TSLA's FSD & Robotaxi Progress Enough?
Even as Tesla's financials show strain, the company continues to push hard on autonomy. Growing adoption of Full Self-Driving (FSD) and the launch of a paid robotaxi service are being pitched as the next chapter of growth — but the road ahead is far from smooth.
Musk expects FSD software to secure regulatory approval in parts of Europe by year-end, though this target was already delayed from his earlier March projection. Despite its branding, FSD is still a driver-assistance system that requires human supervision, making full autonomy a work in progress.
Meanwhile, Tesla officially rolled out its robotaxi service in Austin in June — a milestone in its self-driving ambitions. The company plans to expand into major U.S. markets such as the Bay Area, Nevada, Arizona and Florida, pending approvals. Robotaxis in Austin have already logged more than 7,000 miles without safety-critical interventions, and Tesla expects to scale service areas more than tenfold. Musk suggested that 'probably half the U.S. population' could have access to robotaxis by year-end, assuming regulators agree.
Still, Tesla is hardly the leader here. Alphabet 's GOOGL Waymo dominates the U.S. robotaxi market, running commercial services in four cities and delivering over 250,000 paid rides per week. Backed by a $5 billion multi-year investment by Alphabet, Waymo has years of real-world testing, strong partnerships and a head start that Tesla must catch up to.
What Do Tesla's Estimates Say?
The Zacks Consensus Estimate for Tesla's 2025 revenues and EPS implies a 6% and 31.4% decline, respectively, on a year-over-year basis. Estimates for EPS have also been trending south over the past 60 days.
Conclusion
Tesla isn't being priced like a carmaker with falling sales and shrinking margins — it's still being valued like a tech giant of the future. That mismatch is the problem. Robotaxis and FSD may one day add value, but right now, they are promises against a backdrop of deteriorating fundamentals and intensifying competition. The execution remains uncertain and rivals like BYD and Alphabet's Waymo are already pulling ahead in their respective markets.
At over 10X forward sales, Tesla's valuation leaves no margin for error. With estimates moving lower, cash flow drying up and rivals taking share, the risks far outweigh the potential rewards in the near term.
Tesla no longer commands its premium. Until the company proves it can reignite growth or deliver meaningful progress on autonomy, investors may find better opportunities elsewhere in the auto and tech space.
Tesla currently carries a Zacks Rank #4 (Sell) and looks like a stock to avoid rather than chase.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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