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Tesla Stock: Buy, Sell or Hold?

Tesla is one of the most valuable companies in the world, but it has a lot to prove to live up to it.

If you believe Elon Musk, adze (TSLA 3.91%) is no longer a car manufacturer, it is an artificial intelligence (AI) and robotics company. This makes it much more difficult to assess the stock’s potential and value, as there is very little AI or robotics revenue at Tesla today.

Where is Tesla headed and should investors buy the stock? Let’s break it down into components.

Model 3 on a country highway.

Image source: Tesla.

The electric vehicle business is not what it once was

Tesla’s business today is primarily selling electric vehicles (EVs) with an adjacent energy storage business. For the purpose of this article, I will combine these two businesses and treat them as one.

You can see that free cash flow is down, and so is net income if you take out the $5.9 billion benefit of deferred tax assets recorded in the fourth quarter of 2024.

TSLA net income (TTM) chart

TSLA data on net income (TTM) from YCharts; TTM = last 12 months.

The reason why net income is declining is quite simple. Tesla was able to raise prices — and in turn, its margins — during the pandemic when the entire industry was in deficit, but has been forced to cut prices over the past two years. That will appear in the lower margins.

Margins are shrinking and you can see below that they are now only slightly better than GM (GM 1.56%) and I see (F 1.15%)despite the electric vehicle maker’s stock trading at 30 times its price-to-sales (P/S) ratio. And remember: Tesla’s deliveries and revenue are also down.

TSLA Operating Margin (TTM) chart.

TSLA operating margin (TTM); data by YCharts.

So the market has to put a lot of value on artificial intelligence and robotics.

AI and Tesla’s FSD strategy

We’ve known Tesla has been selling Autopilot since 2014 and its Full Self-Driving (FSD) feature — self-driving that requires human supervision — since 2020. What we don’t know is the adoption rate or anything about the margins of the option. For now, it is included in the automotive business.

Third-party estimates put the adoption rate at 2 percent, though Elon Musk said it was “much higher,” without elaborating. If we assume an adoption rate of 5% for 2 million vehicles sold per year, that could add $120 million per year in additional revenue at the current price of $99 per month. That’s nice, but it doesn’t move the needle much for an $832 billion company.

The vision is that FSD will eventually lead to a fleet of autonomous vehicles. These would be owned by Tesla buyers, who would then pay Tesla for the FSD and make money when they make their cars available as robotaxis.

The reality is that FSD is not legally able to drive a vehicle by itself anywhere in the world today, and it will likely be years before Tesla gets a license to operate any kind of autonomous fleet. Even after that happens, the economics of this business model are unclear.

The market clearly likes the robotaxi idea, but I don’t see how there’s a clear path to cash flow, given that its FSD needs to be supervised today and doesn’t have a path to full autonomy.

The robotics business

Robots are the other part of the business that is extremely unclear. There is a humanoid robot being developed, but what is the market for such a product?

Again, investors are being asked to put a lot of value on a product that doesn’t exist yet, with an unclear market fit.

Tesla stock is not a buy today

Tesla currently trades at 9 times sales and 73 times trailing earnings. Looking ahead, the stock is trading at 93 times analysts’ estimates for next year’s earnings.

That’s an incredibly high multiple to pay for a company with a shrinking core and very high-risk new products in AI and robotics.

I don’t think it’s worth the risk and that’s why I think the stock is a sell today.

Travis Hoium holds positions in General Motors. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: Long Jan 2025 $25 Call General Motors. The Motley Fool has a disclosure policy.

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