Tesla shareholders have seen the value of their investment in the electric carmaker fall by almost a quarter this year. It has been a painful decline as the company has been caught up in American politics, the threat of trade tariffs and signs that demand for EVs could be starting to slow. Yet Tesla remains the most expensive in the so-called Magnificent Seven group of tech stocks — so, even with tougher competition, an ageing line-up and a hefty price tag, are the shares worth buying?
The $960 billion business, founded in 2003 and led by Elon Musk since 2008, is widely considered to be one of the best providers of electric cars in the world — its SUV Model Y was the best selling car in 2024. Last year the company made $7.2 billion in net income on $97.7 billion in revenue, largely from car sales.
• Tesla sales are plummeting — so why is Britain bucking the trend?
But the shares have been caught in a downward spiral since December, especially after President Trump was sworn into office in January. Since then the company has lost roughly a third of its market value.
This is partly because of broader fears in the automotive industry about trade tariffs. But no other major car manufacturer has suffered such a steep decline, and there are few, if any, with a chief executive that is as high profile as Musk. His involvement with Trump, as well as his backing of Germany’s hard right nationalist party AfD, has triggered a handful of protests and acts of vandalism in Tesla showrooms, and sales in Europe have started to falter.
This week, the European Automobile Manufacturers Association reported there was a 40 per cent drop in new Tesla vehicle registrations in Europe last month, even though overall battery EV sales were up 26 per cent. The body also found that Tesla’s share of the European market fell to 1.8 per cent in February, from 2.8 per cent a year earlier.
The figures certainly spooked the market, with the shares falling by as much as 6 per cent on the day of the release. But some have argued the reaction is overdone: analysts at the broker RBC Capital Markets noted the drop only represented about 1,000 Tesla vehicle registrations in Europe, and that data for a seasonally slow month “might not be indicative of true demand”. They argued too that new European car buyers could be waiting for a refresh of the Model Y, or a new affordable model touted for the second half of this year. Tesla is in the process of ramping up production of its redesign of the Model Y, having partially shut down production at certain factories earlier this year to upgrade its manufacturing lines.
• BYD overtakes Tesla as it motors through $100bn in EV revenues
A refreshed line-up is critical given the growing pressure that Tesla faces from Chinese competitors. Tesla’s retail sales in China, excluding exports, fell 87 per cent year on year in February, hitting its lowest monthly sales since August 2022.
The Shenzhen-based BYD is its main rival in the country, having recently reported a 29 per cent rise in revenue to 777 billion yuan ($107 billion), ahead of the $97.7 billion reported by Tesla for its 2024 financial year. BYD mostly operates at the opposite end of the EV market, having just launched a new electric sedan, which has similar specs to the Model 3, for about half the price. Higher price tags at Tesla have historically translated into higher profit margins, though this too has come under pressure as competition has grown tighter. Overall the company’s gross profit margin has dropped from 25.6 per cent in 2022, to 18.2 per cent in 2023 and then to 17.9 per cent in 2024. Meanwhile BYD’s focus on lower price points has helped drive growth, with sales in the first two months of this year up 93 per cent to 623,300 units.
The possible impact of trade tariffs looms over Tesla’s core car business, too. This week Trump announced additional 25 per cent tariffs on all cars not made in the US, which will start to be collected from April 3. Tesla has some level of protection against this thanks to its big factories in California and Texas. But a filing by the US National Highway Traffic Safety Administration suggests that between 60 per cent and 75 per cent of the components Tesla uses are manufactured in the US, depending on the model. Most of the remaining parts are sourced from Mexico. While the value of these imports is unclear, Musk did write on X: “Important to note that Tesla is NOT unscathed here. The tariff impact on Tesla is still significant.”
But the most bullish of Tesla investors have long argued that its best growth prospects are in other parts of the business, such as its artificial intelligence technology, robotaxis and robotics. Indeed in a report this month analysts at the investment bank Morgan Stanley noted the “buyers’ strike from negative brand sentiment” had weighed on near-term sales, but maintained the target price on the stock at $430, implying an upside of roughly 50 per cent, because of Tesla’s potential as an “embodied AI compounder”.
One of the less flashy, but potentially high growth, parts of the business is Tesla’s energy generation and storage business, which it launched in 2015. This technology can play a critical role in maintaining stable supply in electricity grids. This business is relatively small compared with the rest of Tesla, but it has been increasing its contribution to group revenue, up from 6 per cent in 2023 to 10 per cent in 2024, and analysts think it could become more important to overall profit growth over the next few years.
Is the price right?
Even after the dramatic decline in Tesla shares over the past few months, the stock is far from bargain territory. Against the other Magnificent Seven technology companies — Microsoft, Nvidia, Alphabet, Apple, Amazon and Meta — Tesla is still the most expensive stock on most metrics. It trades at an eye-watering enterprise value to adjusted cash profit ratio of 64.9, more than double the average of 21.4 among the other businesses. Its forecast price to earnings multiple of 91 is triple that of the chip designer Nvidia, which trades at a ratio of 24.1. Other American carmakers do not come close: Ford trades at an EV/ebitda ratio of 14.9, and a forecast p/e of 7.4.
But there are plenty of Wall Street analysts who view the drop in the shares as a new buying opportunity. It is a view shared by many retail investors too: while fewer British drivers are buying new Tesla cars for themselves, shares in the business were the second most popular investment on Hargreaves Lansdown last week, second only to the FTSE 100 engineer Rolls-Royce.
Still, such a rich valuation leaves little room for error, which may be increasingly difficult to maintain given possible pressures from tariffs, competition from Chinese players and the uphill battle Tesla may face in recovering its brand reputation among green, left-leaning drivers.
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