Tesla Stock's $1 Trillion Puzzle

Tesla (NASDAQ:TSLA) is encountering a perfect storm of challenges on multiple fronts. Sales have dropped significantly, falling 13.5% year-over-year in Q2, following a similar decline in Q1. Profits decreased by 70% in Q1. The brand has suffered due to Musk’s involvement in politics. The company no longer benefits from the regulatory support we anticipated during the Trump Administration. In fact, the situation seems unfavorable, especially after Elon Musk’s highly publicized disagreement with the President. Chinese electric vehicles are becoming far more attractive, rendering Tesla’s cars less appealing, particularly in global markets. The much-anticipated Cybertruck pickup seems to be falling flat.

Google is showing that Tesla is not the sole contender in the self-driving arena. The Waymo robotaxi service has gained a significant lead on Tesla’s robotaxi and is conducting over 1 million fully autonomous, paid rides each month across Phoenix, San Francisco, and Los Angeles, up from fewer than 50,000 rides about two years ago, all while maintaining a strong safety record. In many ways, Waymo appears to be surpassing Tesla. So, despite Tesla’s shortcomings in various areas, why is the company still valued at nearly $1 trillion – more than the combined market capitalizations of the next 10 automakers? There could be several explanations, although we cannot say for certain that they are well-founded. (related While Tesla Talks, Waymo Drives)

Tesla’s Tough Valuation Math

Tesla’s earnings for the upcoming year, FY’26, are estimated to be around $2.90 per share, according to consensus predictions. For simplicity, let’s assume that these earnings derive solely from the automotive segment – excluding any contributions from software or renewable energy. (How big is Tesla’s software business?) Even if we apply a generous valuation multiple of 30x to this earnings figure, which is significantly higher than the low double-digit multiples typically assigned to traditional automakers like Toyota and Honda, as well as much higher than the single-digit P/E ratios common for major U.S. companies like Ford or GM, that would still indicate a stock price of under $100. This would imply a market cap of roughly $300 billion for Tesla. In other words, when considering only the automotive aspect, Tesla would be valued much less than its current market cap of nearly $1 trillion. So where is the rest of this value coming from? The explanation lies in investors’ belief that Tesla is still significantly ahead in autonomous driving, robotics, and broader AI applications.

The FSD and Robotics Story

There are several solid reasons for this belief. Consider Full Self Driving and robotaxis, for example. The overall cost of a Waymo vehicle was estimated to be between $150,000 and $200,000 as of 2024. In contrast, Tesla’s mass-market vehicles – such as the Model 3 and Model Y – come with all the FSD hardware pre-installed, starting at under $50,000. This gives Tesla a significant cost advantage. Furthermore, Tesla already has millions of vehicles on the road and is contemplating launching a dedicated robotaxi priced below $30,000. The ride-hailing market is already massive, and prior estimates have suggested that the market for autonomous ride-hailing might be even larger – a $750 billion autonomous ride-hailing market is plausible! (A closer look At Tesla’s just launched Robotaxi business) Thus, having a large base of relatively affordable vehicles, all equipped with FSD, provides Tesla with a potential distribution edge.

Moreover, the Optimus robot could represent another significant initiative. The robot is intended to handle repetitive, hazardous, or mundane tasks in factories, warehouses, and homes. Tesla aims to produce millions of these robots annually by 2030, targeting a price of $20,000 or less. If they succeed, Optimus could become Tesla’s next major product category. There are other competitors in this field, including Boston Dynamics. Tesla excels in AI with its self-driving technology and has greatly automated its production facilities, which has clearly fostered investor optimism. Tesla also possesses the manufacturing capabilities to accomplish such ambitious projects. The company operates with far greater levels of automation compared to most automakers, utilizing large-scale casting with the Gigapress, high levels of robotics, and vertically integrated processes. These innovations have minimized its dependence on manual labor in many areas, such as welding, assembly, and material transport.

And naturally, there’s Elon Musk. Musk’s renewed emphasis on Tesla, after stepping back from his government roles earlier this year, is anticipated to aid the company in pursuing its long-term objectives with more vigor. Certainly, autonomous driving and robotics remain exceedingly complex challenges. However, Musk’s vision, proven track record of execution, and ability to galvanize people and resources seem to instill confidence in investors that Tesla will deliver.

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