This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla (NASDAQ: TSLA) has long been a battleground stock with very divided views about where the stock will go, and the trenches only seem to have gotten deeper in recent months.
CEO Elon Musk, no stranger to controversy, has become a highly polarizing figure over his entry into politics. His alliance with U.S. President Donald Trump, his campaign to lay off federal employees as the head of the ad hoc organization known as the Department of Government Efficiency (DOGE), and his support of the far-right AfD party in Germany have all raised questions that are affecting Tesla.
Investors' doubts about Tesla stock can be seen in the stock's recent rollercoaster ride. Shares soared after Trump was elected, only to give up all those gains, as the thesis that it will benefit Tesla seems to have fallen apart since the inauguration.
Despite the challenges, at least one notable Tesla bull continues to stand behind the stock. In fact, she has a new price target calling for the stock to 10x from here. Cathie Wood, the head of ARK Invest, issued new guidance asserting that the stock will hit $2,600 per share in five years. In an interview with Bloomberg, Wood argued that robotaxis would account for 90% of its value by that time.
Musk has been hyping investors around the so-called "robotaxi" for years now, saying he believed that an autonomous vehicle marketplace would make Tesla the most valuable company in the world. However, bulls like Wood appear to be overlooking several risks to the company, and Tesla is arguably in a more vulnerable position than it's been since it turned profitable. At this point, a crash in the stock seems more likely than the company reaching a market cap of $8 trillion. Here are several reasons why.
The European business appears to be collapsing
According to registration data from January and February, Tesla's sales have fallen off a cliff. Through the first two months, registrations, which are seen as a proxy for sales, declined 42.6%. Tesla claimed just 1.8% of the total auto market, or 10.3% of the battery electric vehicle market.
Several factors seem to be weighing on the brand in Europe. In addition to Musk's political activities and the region's broader geopolitical tensions with the U.S., Tesla has also failed to update its vehicle lineup, and competition in EVs has intensified in the last few years. Cheaper Chinese models have also taken market share.
Still, the Musk-influenced brand crisis seems like the most obvious explanation for the sudden plunge in sales.
The brand is turning into political kryptonite in the U.S.
Tesla is experiencing an unprecedented bout of vandalism at several of its dealerships and charging stations in North America, which seems to be motivated by Musk's activity with DOGE. There's also been a backlash among existing Tesla owners, including some who have sold their vehicles, as they no longer want to be associated with the brand. Musk's political stance has even spawned a cottage industry of bumper stickers declaiming him.
Musk's alliance with Trump is contradictory because his customer base and the policies supporting EVs have historically come from the other side of the political spectrum. But the Tesla CEO has said before that, unlike most CEOs, he's unwilling to restrain his political speech, even if it costs him customers. In a 2023 CNBC interview, he said: "I'll say what I want, and if the consequence of that is losing money, so be it."
He seems to be standing by those words.
Even Tesla bulls are fed up
Even Tesla's biggest supporters seem to sense that the brand is in trouble. Ross Gerber, a longtime Tesla shareholder and a vocal defender of the company, is calling on Musk to step down as CEO, saying that his work with the Trump administration has become a distraction and he hasn't been focusing on Tesla.
Wedbush analyst Dan Ives, who has been cheerleading Tesla throughout the AI era, said Musk should pull back from his work on DOGE and be more engaged with his EV company.
Musk has long run several companies in addition to Tesla, but something does seem to have changed since he began working with the Trump administration.
Tesla's results have been underwhelming
Tesla trades at the valuation of a disruptive growth stock, but its recent results are more like those of a mature automaker. In 2024, Tesla's vehicle sales declined for the first time ever, and total revenue rose just 1%, while automotive revenue was down 6%.
Musk assuaged investors by telling them that production would increase by 20% to 30%. However, the electric vehicle market appears to be plateauing faster than expected. Demand, rather than production, looks to be Tesla's primary challenge, especially given the reports out of Europe.
In addition to those issues, Tesla's Cybertruck, the only new vehicle model it's released in five years, just faced a recall from the National Highway Traffic Safety Administration of nearly all 46,000 vehicles on the road due to an exterior panel that can fly off the car on the road, endangering other drivers. That marks the eighth recall on the Cybertruck in just 15 months, adding to safety concerns about it. It also appears that with just around 46,000 Cybertrucks sold, sales of the model have significantly underperformed Tesla's expectations as Musk once touted more than 1 million reservations for the futuristic vehicle.
Tesla has also issued several other recalls on other vehicles, and concerns about product safety could crush its ambitions for an autonomous vehicle ridesharing network, which has a much higher safety threshold than a conventional vehicle.
Could Tesla really plunge to $26?
I don't think it's likely that Tesla will tumble all the way to $26 a share, essentially a 90% drop from its current price, but it's not as far outside the realm of possibilities as the market seems to believe. Having gone public in 2010, Tesla stock has never endured a conventional recession (the coronavirus recession was short-lived). Plenty of growth stocks fell by 90% in the financial crisis and the dot-com bust, and Tesla's profile makes it especially vulnerable to an economic downturn.
The company sells a premium-priced durable good, which is exactly the kind of purchase that people delay or forego when times are tough. Tesla's stock is also set up for a crash if the market winds shift. After all, it trades at a triple-digit price-to-earnings ratio, even as sales were flat last year. That's not even factoring in the current brand crisis, which seems to have just started this year.
Cathie Wood could be right that Tesla's robotaxis will prove to be a disruptive innovation, but the company has yet to perform a single autonomous robotaxi ride. In contrast, Alphabet's Waymo has done more than 5 million autonomous rides, and the stock earns no premium for that. In fact, Alphabet currently trades at a discount to the S&P 500. Based on that comparison, Tesla seems grossly overvalued, even after factoring in its potential in autonomy.
We'll learn more about Tesla's prospects when it reports first-quarter deliveries on April 2. But weak results could set off a downward spiral for the stock, especially if the economy continues to weaken.
Tesla is potentially facing a combination of a politically controversial CEO, an aging product lineup, rising competition, electric vehicle fatigue, product safety concerns, a trade war, and a slumping economy. If the numbers start to go south, even Musk's hype around autonomy is unlikely to save the stock.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
