This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Autonomous driving technology and robotics could transform Tesla into a much different company.
- Its electric vehicle sales are slowing, and its margins are shrinking.
- Investors have priced lofty expectations into the stock.
Tesla (NASDAQ: TSLA) might be one of the more difficult stocks to own comfortably due to the amount of volatility there has been in its share price, but it has been a huge winner for some investors over the years. Its successful phases have made it into one of the world's most valuable companies, with a market cap of close to $1.5 trillion.
The electric vehicle (EV) maker's stock is up by around 105% in the past five years, and it's within reach of the all-time high it touched last December. Should investors buy Tesla while it's below $500?
Imagine a completely different future
The bullish view of Tesla is that it is transforming into a software, robotics, and artificial intelligence enterprise. This is precisely how CEO Elon Musk wants investors to think about the business.
Tesla has long-term optionality with its robotaxi operations, which are currently carrying paying passengers in Austin and the San Francisco Bay Area in a controlled capacity, with more cities to come. The objective here is to get that business going in a lot more markets -- not only in the U.S., but internationally as well. The premise assumes that as demand and usage pick up, costs as a share of revenues would come down. The best outcome would be for Tesla to generate a colossal amount of recurring, high-margin revenue from driverless cars.
Humanoid robots might be an even bigger opportunity -- Musk estimates that business could help Tesla reach a market cap of $25 trillion. It appears that there could be a market for these devices among commercial clients that would use them in factory settings. There might also be demand from consumer households.
In short, a decade from now, Tesla might look totally different from how the company looks today. However, when looking strictly at its current situation, it's not easy to always be optimistic. Tesla's revenue growth has slowed dramatically due to a combination of intensifying competition, higher interest rates, and a public backlash among some consumers over Musk's forays into politics. Profits have been under pressure, too: Its Q3 2025 operating margin of 5.8% was down sharply from the 10.8% margin it produced in the prior-year period.
Is Tesla stock overvalued or undervalued?
It can be difficult for investors to effectively gauge the valuations of a company like Tesla. Based on traditional metrics, like its price-to-sales ratio of 17 or the price-to-earnings ratio of 304, the stock is ridiculously overvalued. One would only expect investors to buy shares of a company trading at such lofty premiums if it were putting up remarkable financial performances, delivering monster growth and significant profits. Yet Tesla hasn't been operating at a high level recently.
Viewed in this light, the shares are extremely expensive. But of course, Tesla is a story stock. The market's actions today are defined by narratives, which can clearly have huge impacts on share prices. Tesla and Musk get so much attention for their innovativeness and forward-thinking that it makes sense that many investors are believers.
If Tesla's self-driving vehicles and robots prove successful in a reasonable time frame, then the stock's current valuation might very well end up looking like a bargain in retrospect. Earnings could grow substantially, lifting the stock up.
Whether it will achieve that favorable outcome, though, is far from clear. Tesla will need to execute in a near-flawless fashion, and not just from the technological and manufacturing perspectives. It will need cooperation from regulators and legislators. And there's no certainty that its future products will see the type of customer adoption that the bulls predict.
Moreover, a critic could argue that Tesla's current valuation essentially prices in a great deal of the optimistic forecast for success. Only investors who are able and willing to take on a lot of risk in their portfolios should even consider buying this EV stock now. While there is a chance that the investment could be a profitable one over the longer term, it's impossible to accurately assess. Risk-averse investors would be better off avoiding Tesla at these levels.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
