This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla (NASDAQ: TSLA) has been one of the best-performing stocks on the market over the last five years but also remains a battleground among investors. CEO Elon Musk has long been a lightning rod for controversy, most recently for his strong support of newly elected President Donald Trump, who has put him in charge of the new Department of Government Efficiency. Tesla stock has also soared since Trump was elected, up by around 70% since then, making the company one of the largest in the world. According to this research from the Motley Fool, the company was the eighth-largest in the world as of January 6.
Tesla's bona fides are well-known by now. The company is one of the largest electric vehicle (EV) makers in the world. It was recently surpassed by China's BYD, but the two are still closely vying for the top spot. However, Tesla isn't just valued as a straight EV company. Investors have bid up the stock price on hopes for its autonomous technology, which includes both autonomous vehicles like the recently unveiled Cybercab and its autonomous robot, Optimus. The timeline for those products going on sale still isn't clear, but Tesla aims to begin production of the Cybercab by 2026.
Shares of the EV maker are on a roll following Trump's election, and it's one of the biggest companies in the world, but is it a buy for 2025? Let's take a look at the bull and bear case for the stock.
The Tesla bull case
Tesla pioneered and essentially proved the market for electric vehicles, and it's built an unrivalled brand and ecosystem in the EV industry. It's built the world's largest fast-charging network, and its brand ranges from mass-market cars like the Model 3 to luxury vehicles like the Model S, X, and Cybertruck, whereas rival BYD plays at the lower end of the EV market.
In addition to a strong brand and global positioning, Tesla's autonomous technology also gives it an advantage. While Alphabet's Waymo is generally believed to be the technological leader in autonomous vehicles and operates the largest active autonomous ridesharing network in the country, Tesla's much larger fleet of vehicles and its ability to upload AV software like full self-driving, to any Tesla on the road potentially gives it an advantage in the autonomous race.
Finally, electric vehicles only have a small percentage of the overall market share in the auto sector, and public policy around much of the world, along with environmental concerns, is helping to convert market share to EVs. That should favour Tesla over the long run.
The Tesla bear case
While Tesla has a lot of future potential, there are reasons to be concerned about the business and the stock. First, Tesla's recent financial results have been woeful. The company finished 2024 with a decline in vehicle sales, its first since 2011.
In the third quarter, overall revenue was up 8% year over year due to sharp increases in its energy and services businesses, but automotive revenue grew just 2% to $20 billion. Tesla's profit margins improved, overcoming an earlier decline in profits. However, the business will be tied to revenue growth as the auto industry typically has low gross margins.
Musk has said that production volume would increase by 20%-30% in 2025, but Tesla has not always followed through on Musk's targets, and there are genuine questions about demand in the EV industry as growth in the U.S. has slowed across the industry. That's a sign that the transition to EVs may not be as smooth as some hope, and it could get worse with the Trump administration in office as Trump is expected to get rid of the EV tax credit and take steps to support fossil fuel companies.
Additionally, Tesla stock has gotten pricey after the recent rally. It trades at a price-to-earnings (P/E) ratio of roughly 200 based on adjusted earnings, and its primary business is in a sector where most stocks trade at a P/E of less than 10. Tesla deserves a premium for its potential for disruption in autonomy and beyond, but a P/E of 200 for a company with nearly flat revenue growth currently is essentially unheard of.
Is Tesla a buy for 2025?
Tesla's vision for autonomy might be unmatched, but meaningful execution still seems several years away. Meanwhile, the stock looks incredibly expensive, even for a tech company, and the EV demand growth curve investors were counting on seems to be fractured. The Trump administration also looks set to challenge the EV industry further.
At this point, buying the stock seems to be a clear bet on the company succeeding in autonomy, but the valuation still leaves a long way for the stock to fall if the business disappoints. Given that outsize risk, investors might be better off avoiding the stock in 2025, at least until the valuation moderates or it shows clearer signs of progress in autonomy.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
