Should You Buy Tesla Stock Before Robotaxi Day?

2024 was not good adze (TSLA 1.52%) shareholders. While S&P 500 up 21%, the electric vehicle (EV) leader’s stock has been on a roller coaster ride, leaving it more or less flat year-to-date due to competition and consumer fatigue. While the stock still enjoys a premium valuation, it’s unclear how much longer it will be able to maintain it unless CEO Elon Musk finds a way to revive the company.

It’s hard to justify Tesla’s valuation

Trading at a the forward price-earnings ratio (P/E) of 85, Tesla stock is valued substantially higher than the broader market’s ratio of 24. And its valuation is much higher than that of other major US automakers such as I see or General Motorswhich have forward P/Es of just 5.3 and 4.7 respectively. In the past, this premium level could be explained through Tesla’s unique EV focus and its higher margins. But those justifications just don’t hold as much water anymore.

Traditional automakers have gone all-in on electric vehicles and are rapidly gaining market share. For example, Tesla’s third quarter deliveries were up just 3% year after year at 439,975 units (the company doesn’t break out its business by country, but the US is its biggest market). By comparison, GM’s U.S. EV deliveries rose 60 percent to 32,095.

Tesla’s margin advantage is also starting to fade. In the second trimester, operating margins it fell to just 6.3% from 9.6% a year earlier. And the company could face even more pressure from vertically integrated Chinese rivals such as BYD (which is also a leading EV battery manufacturer) that may be able to raise its prices in key markets such as Asia and Europe.

BYD plans to open a second plant in Europe in 2025 to produce affordable electric vehicles such as its Seagul compact car, which it is to be expected to cost less than $21,550 in the mainland and less than $10,000 in China.

Can cheaper cars save the day?

Tesla’s auto business doesn’t seem able to justify its premium valuation. And in the next three years, Elon Musk may need to achieve a major pivot to software to keep stock from crashing. The good news is that management seems to be very aware of what have to be made.

This week, Tesla will host “Robotaxi Day,” a much-anticipated live event where will it be reveals its latest ideas, including a new compact electric vehicle that will launch for around $25,000 in 2025. This long awaited vehicle will return one of Musk’s most ambitious goals in reality. And it could also reignite Tesla’s growth by putting EV ownership within the reach of the masses.

But while cheaper cars could be great for the Tesla unit’s sales volume, they probably won’t do much to improve their margins. And instead of creating one economic moatit could trap the company in a continued race to the bottom as other companies follow suit. Ford is reportedly working on its own affordable EV platforms through a semi-autonomous “skunkworks” team.

Tesla will have to become a technology company

Most important One aspect of Robotaxi Day will naturally be Tesla’s update on its autonomous car program. According to analysts at McKinsey & Company, the ride-sharing market for autonomous vehicles could reach $300 billion to $400 billion in revenue by 2035, with much of that money likely going to services and licenses by a large margin. If Tesla can successfully provide the technology that robotaxi services will require, which could easily justify its current rating and possibly send it higher.

That said, these are speculative projections. Tesla will have to compete with other well-capitalized rivals such as Alphabethis Waymo and General Motors Cruise, who are is also working on self-driving technology. Investors buying Tesla stock at current prices will have to have a lot of faith in management’s ability to navigate an incredibly uncertain situation. And it might make sense for them to wait for more information before buying.