This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla's (NASDAQ: TSLA) investors have had a nerve-racking ride over the last few months. The stock soared to an all-time high on the back of enthusiasm accompanying Donald Trump's re-election, but it has given back all of those gains since peaking at $488 in December 2024. The stock closed Monday at $238.
Some bears are concerned about Elon Musk's political involvement, though the bulls remain steadfast about Tesla's long-term prospects. Is the stock a buy after its recent plunge?
Why has Tesla's stock crashed?
One of the most important things that investors must know before buying a declining stock is what might have caused the stock to fall in the first place. While this exercise is never straightforward and precise, you need a broad idea of what's going on with the company.
In the case of Tesla, a few significant issues have been driving the recent stock performance. Topping the list is probably Musk's close involvement in U.S. politics. On one hand, his close association with Trump and Musk's leadership of the Department of Government Efficiency initiative may displease consumers with different political stances, which could be hurting sales. Multitasker Musk's active involvement also means that he has less time to run Tesla, which could affect the company in the long term. Musk also has leadership roles at SpaceX, which he founded, and social media platform X, which he bought.
To add salt to the wound, Tesla recently reported disappointing financial performance. Revenue grew just 1%, while net income fell 53% year over year in 2024. The company delivered 1% fewer cars in 2024, and that's despite huge price cuts. Tesla's weak sales performance suggests that competition in the electric vehicle (EV) industry has intensified, requiring the company to act quickly or risk losing its market share.
Tesla's long-term prospects remain optimistic
While Tesla's near-term prospects seem unexciting (even negative, given the issues discussed above), its long-term opportunities remain plentiful.
The EV transition is still in its early innings, and it will take years, if not decades, for this megatrend to fully unfold. As the leader in this industry, Tesla is favorably positioned to grow its sales as electric vehicles gradually replace cars with internal combustion engines.
Besides, Tesla is working hard to reduce its production cost over time so that it can price its cars more affordably and gain market share. To this end, its average cost of goods sold per car fell to a new low in the fourth quarter of 2024, and could fall even more, leveraging Tesla's growing operating leverage.
Beyond its bread and butter selling electric cars, Tesla has positioned itself to ride multiple megatrends that could be worth even more than the EV industry over time. Take autonomous driving, for example. Tesla aims to lead the robotaxi industry. It plans to start producing its robotaxis in 2026 in its gigafactory in Texas.
Another area that could see a significant boost in the coming years is renewable energy. Tesla has products ranging from batteries to solar panels and charging networks. And let's not forget Optimus, Tesla's humanoid robot that could change how we live and work. Altogether, these young ventures have potential addressable markets worth hundreds of billions (even trillions) of dollars.
Of course, this assumes that Tesla will not lose its focus and will continue to execute in the coming years.
The stock is pricey
One of the biggest problems investors face when buying Tesla stock is its valuation. Tesla's stock has almost always been priced at rich multiples thanks to investors' optimism about its prospects.
But with its recent decline in stock price, is Tesla finally trading at a reasonable valuation? Let's look at two simple ratios: price to sales (P/S) and price to earnings (P/E).
As of this writing, the stock trades at P/S and P/E ratios of 8.6 and 118, respectively. For perspective, Google parent Alphabet's P/S and P/E ratios are 6.2 and 20. So while Tesla's stock has declined massively, it is still pricey considering the bulk of its revenue is from selling cars, yet it trades at multiples higher than those of a leading tech giant.
In other words, investors have priced many of Tesla's yet-to-materialize prospects into the stock price.
What it means for investors
Tesla remains one of the most exciting yet polarizing stocks in the market. The long-term potential in EVs, autonomous driving, and energy solutions is undeniable. Still, the company's near-term challenges -- from weak financial performance to leadership concerns and political controversies -- are equally significant.
At its current valuation, Tesla still demands a premium. So, while the stock's sharp decline may tempt investors looking for a bargain, the risks remain high, especially given growing competition and execution uncertainties.
Except for those with high-risk appetites, investors should avoid the stock for now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
