This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Tesla's core business is gaining momentum again after a weak stretch earlier this year.
- The company is pouring cash into autonomy, robots, and energy projects that are reshaping the business.
- Management's growth plans will incur substantial costs -- on top of an already capital-intensive business.
Tesla (NASDAQ: TSLA) is a fascinating business. The electric-vehicle and energy company is pushing into autonomous ride-sharing and humanoid robots while still ramping its core electric vehicle and energy storage operations.
I admire what Tesla is building and expect the company to be extremely successful over time. But valuation is a critical part of investing -- and at today's price, the stock already bakes significant growth for years to come, leaving very little margin of safety if the company's growth plans take longer than expected or if expanding into these new business lines costs more than anticipated.
With this backdrop in mind, I'd buy into the story -- but only at the right price.
Growth is recovering
After a sluggish first half of 2025, Tesla returned to double-digit revenue growth in Q3. Total revenue for the period reached $28.1 billion, a 12% increase year over year, driven by record vehicle deliveries and strong demand for large-scale energy storage projects. Automotive revenue rose 6% year over year to about $21.2 billion, while the energy generation and storage segment grew revenue 44% to roughly $3.4 billion as deployments reached 12.5 gigawatt-hours.
The company delivered more than 497,000 vehicles in the quarter.
Profitability, however, told a different story. Third-quarter operating income fell 40% year over year to $1.6 billion, and operating margin dropped to 5.8% from 10.8% a year earlier. Operating expenses increased by 50% to approximately $3.4 billion, as the company invested heavily in artificial intelligence infrastructure and new product development.
Valuation and my buy price
As of this writing, the stock has a price-to-earnings ratio of about 270 and trades at about 14 times sales. Those are demanding multiples for a company that still earns most of its revenue from selling vehicles. And even if investors expect Tesla to look more like a high-margin software and services platform over time, today's valuation already prices this in.
In the meantime, Tesla's business remains capital-intensive. But management hopes high-margin businesses -- self-driving software sales and an autonomous ride-sharing network -- can help the company transform into a technology company with tech company-like margins. Then there's Tesla's plans for humanoid robots, but it's unclear what kind of margins it can achieve in such an unprecedented business.
The problem? Each of Tesla's growth initiatives will require significant sums of capital to scale. In addition, there's timing risk. These growth initiatives carry technical and regulatory risk that could delay commercialization.
Investors can already see the strain. Operating expenses in the third quarter rose much faster than revenue. That kind of spending is understandable for a company that believes it has an opportunity of unusual size. But does the stock's valuation leave enough room for the risks associated with building out these new product initiatives?
At a price that values Tesla well over 250 times current earnings and about 170 times forward earnings, even modest setbacks in autonomy timelines or vehicle demand could create sharp swings in the stock.
That is why my own discipline points to a lower entry point. I believe that at around $220 per share, the stock would still carry a valuation that reflects Tesla's position in electric vehicles and its growth opportunities in higher-margin businesses.
Of course, this doesn't mean investors should sell shares they already own. Extreme volatility is part of owning a stock with so much future potential baked in. So it's normal for shares to trade in a wide band. In addition, given Tesla's long history of incredible growth, the company could very well exceed even my most optimistic expectations.
Still, I'm happy to admire the business from the sidelines and keep my buy price near $220, for now. This, of course, is a moving target that may very well move up over time as I get new information about Tesla's ever-expanding business.
While there's no guarantee shares actually fall to this price, I'll be ready if they do. In the meantime, I'll take new capital elsewhere.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
