Tesla’s lofty AI dreams already baked into towering valuation

Elon Musk wants people to invest in Tesla Inc. only if they trust it can make self-driving cars. The trouble is, the stock already trades at levels that assume the company has cracked that code, and then some.

The electric vehicle maker’s shares are considerably more expensive than those of Nvidia Corp. and Microsoft Corp. — two mega-cap companies widely seen as AI pioneers. Yet, while earnings estimates for both these tech giants are rising, for Tesla they are plummeting — because EV demand is slowing.

“Musk has always wanted Tesla to be viewed as more than an EV maker, but that works when there is growth in the core business," said David Mazza, chief executive officer at Roundhill Investments. “When your core business is declining, that narrative is a lot harder, which is why I think the multiple right now is detached from reality, and the stock is not cheap despite coming down a lot this year."

Tesla’s stock trades at 63 times forward earnings, compared to Nvidia’s 33 and Microsoft’s 30, as of Thursday’s close. And as analysts’ expectations about Tesla’s profits continue to drop — especially after a first-quarter report that missed across the board — the valuation multiple just keeps getting steeper.

The shares were caught in a free fall until just last week, amid nervousness about Tesla’s growth prospects. But the quarterly earnings call, where Musk made his bold pronouncement about autonomous vehicles and AI, marked a turning point for the stock. Since the results, it has soared more than 24%, helped by news that the company is closer to getting its driver-assistance software approved for launch in China. On Friday, the stock advanced another 1.8% amid a broader market rally.

But Musk’s focus toward this lofty future goal has come at a confusing time for investors. Fully self-driving cars are a technology that most analysts and experts say is likely years, if not decades, away from full-scale commercial adoption. Tesla is struggling with weak demand for EVs and just reported its first quarterly sales decline since 2020. On top of that, it seems to be stepping away from projects once seen as a key strategic advantage for the company — such as its charging network.

More importantly, Tesla has offered investors very little, apart from Musk’s own track record, to show that its efforts to create a truly autonomous car will be more successful than say General Motors Co.’s Cruise, which grounded its fleet last year, or Ford Motor Co. and Volkswagen AG’s Argo AI, that shut down in 2022. Tesla intends to unveil its so-called Robotaxi in August.

Read More: Tesla Seals Deal for China Maps That Musk Says Cars Don’t Need

“Full self-driving may not be a winner-take-all market, and if it is, it is not clear that Tesla will win," said Toni Sacconaghi, an analyst at Sanford C Bernstein. The analyst’s own use of the driver assistance software — that Tesla has started to offer for free trials — also revealed everyday shortfalls. Overall, reviews of the software have been mixed.

In contrast, both Nvidia and Microsoft have proven their AI credentials beyond doubt. As a chipmaker, Nvidia dominates the market for accelerators that power data centres running complex computing tasks needed for AI development. Microsoft, with its large bet on OpenAI, is already seeing demand for its AI offerings boost sales and profit.

Tesla’s market capitalization of $574 billion — bigger than the combined value of General Motors Co., Ford Motor Co. and Toyota Motor Corp. — is becoming further unmoored from its core EV operations. According to Evercore ISI analyst Chris McNally, less than half of the company’s market capitalization is now based on the auto business. A different analysis by DataTrek Research’s Nicholas Colas showed that nearly 80% of the company’s share price is predicated on future growth potential.

Competition is heating up in the self-driving space as well. If anything, the combination of these highly stacked odds against Tesla and the stock’s rich valuation shows the immense value that investors attach to Musk.

“Tesla is a faith-based stock," said Steve Sosnick, chief strategist at Interactive Brokers. “It is really about investors’ faith in Elon Musk’s ability to deliver visionary ideas. And for most of this company’s history, that faith has been richly rewarded."

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