Elon Musk likes to make bold claims. Some of these claims come true, but many do not. Recently, he has stated that he believes Tesla (TSLA 4.66%) can be the most valuable company in the world someday, claiming that it could be worth more than the next five companies combined in market capitalization. Today, these stocks such as Nvidia are worth more than $10 trillion in combined market capitalization.
Tesla’s market cap is under $900 billion, meaning that Elon Musk is claiming that Tesla has a chance to go up by around 10x in price from here. Is he correct, and should you buy Tesla stock today? Let’s dig further into Musk’s claims and find out.
A struggling car business
After growing for years, Tesla’s automotive business has flat-lined in the last few quarters. In Q1 of this year, deliveries to customers were down 13% year over year to 337,000 while competitors take share in countries around the globe. Automotive revenue slipped 20% year over year, a faster drop than deliveries because of Tesla’s huge price cuts implemented on its models. The new Cybertruck vehicle has been a major flop and will not be generating significant sales for the company anytime soon.
Profit margins are falling, at 7.4% over the last 12 months, which is leading to a huge dip in earnings power for Tesla. If deliveries keep falling with lower selling prices, Tesla is going to struggle to keep operating margin from falling throughout the rest of this year. The company does not have long-term guidance for 2025, but all forward indicators say that the decline in sales will continue throughout the year. Sales keep falling in China, Europe, and the United States, which are Tesla’s largest markets.
With no new models on the horizon — at least from what management has publicly disclosed — it is hard to paint a pretty picture for Tesla’s automotive business in the future. Perhaps it can make some money from the new Cybercab and autonomous vehicle technology, but that is a theoretical future Tesla has been promising for years. It has never deployed a robotaxi, while its competitor Waymo now does 250,000 rides per week.
And will it be beneficial enough for Tesla to reach a market cap of $10 trillion? That seems even more unlikely.
A person charging a Tesla.
Can we bank on the Optimus Robot?
Elon Musk’s optimism for Tesla at the moment comes from the potential of the Tesla Optimus Robot, a humanoid robot the company is developing. He believes that if these robots have artificial intelligence (AI) software and can perform physical tasks for humans, there is a market for $10 trillion in revenue selling 100 million bots for $100,000 apiece. That is not a typo.
While $10 trillion in revenue sounds exciting, these are fantastical claims from the leader of Tesla. Tesla has never built a functioning humanoid robot. The robots at its demonstration were remotely controlled by humans. If it can get a working robot, it is hard to envision demand for 1 million units a year, let alone 100 million. There are only so many corporations and wealthy individuals that would buy these bots every year, if they ever get made in the first place.
Of course, Musk can claim as optimistic of a figure as he wants. That does not mean these figures are grounded in economic reality.
TSLA PE Ratio data by YCharts
The hard truth investors need to realize
Investors in Tesla are slowly realizing a hard truth: The stock has been overvalued for years. It traded at just under $300 at the beginning of 2021. Today, it trades below this level at a price of around $275, and it is likely still overvalued.
Tesla stock trades at a price-to-earnings ratio (P/E) of 150. A typical automotive stock will have a P/E closer to 10 (I used Toyota Motors in the chart above a stand in for the indsutry since most trade around this range). Remember, Tesla’s automotive revenue is declining by 20% a year at the moment, with bad forward-looking indicators.
Management is promising a lot with the Cybercab and Optimus Bot, but these are not real businesses yet. It would be cool if the company could innovate and pull it off, but that doesn’t mean the stock is cheap today.
Even with the stock down and Elon Musk saying Tesla could be worth 10x its current market value someday does not mean you should buy the stock. When you peel back the layers of this onion, all I see is a struggling automotive business trading at an expensive P/E ratio. Stay far away from Tesla stock until further notice.
