Tesla’s 40% Drop: Why Bears Say The Worst Is Yet to Come

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The recent stock market drop has been a punishing time for the Magnificent Seven tech stocks, and the company hit worst by it has been Tesla (NASDAQ:TSLA).

Shares of the EV manufacturer are down by a jaw-dropping 40 percent in the last three months and 26 percent in the last month alone.

Today, we examine the bear case for Tesla to see what bears are saying about why the worst may be yet to come.

Key Points

  • Despite a sharp decline, Tesla trades at extreme multiples, fueled by projects like Cybercab and Optimus rather than core EV profitability.

  • Tesla’s deliveries are falling for the first time, with increased competition and slower EV market growth adding pressure.

  • Musk’s government role appears to be damaging Tesla’s brand, especially in Europe.

Tesla Stock Still Looks Significantly Overvalued

Even after falling so far recently, TSLA shares still appear quite overvalued, potentially setting them up for further losses. Tesla still trades at 121 times earnings and about 9 times sales.

The company’s P/E is astronomical, especially for a company that is only delivering a net margin of 7.3 percent and a return on invested capital of 9.6 percent. On an EV-to-free-cash-flow basis, Tesla trades at an even more unlikely ratio of 215.

Perhaps the bigger problem for Tesla isn’t just that the stock is overvalued but why it’s overvalued. After all, fast-growing companies with solid business models and wide moats can justify premium valuations under the right circumstances. In Tesla’s case, however, the value multiples appear to have become more about hype and futurism than the company’s real business.

Two thus far speculative projects, namely the Cybercab and the Optimus humanoid robot, have contributed to Tesla’s sky-high valuation. Bulls claim that both of these projects have the potential to deliver massive long-term earnings growth, justifying not only the price that Tesla trades at today but even its price before shares began dropping.

The Cybercab is a fully autonomous taxi that isn’t even set to begin production until 2026 at the earliest and may well face years of regulatory opposition due to its lack of a wheel or pedals that would allow a human driver to take control of the vehicle. As such, its ability to add to Tesla’s earnings and the timeline on which it would do so are both deeply uncertain.

The Optimus project is even more speculative and riskier to invest in. There’s little evidence, according to the bears, of concrete demand for the millions of humanoid robots Tesla hopes to create, and the AI technology needed to make them useful doesn’t actually appear to exist yet. At a promotional event last year, the robots mixed drinks, danced and performed various other tasks to showcase their capabilities. It was later revealed that much of this impressive performance was the result of Tesla employees controlling the robots remotely.

Cumulatively, this paints a fairly bleak picture of Tesla from a valuation standpoint. The stock is trading at extremely high multiples to its current performance on assumptions about speculative and expensive projects that probably won’t meaningfully add to earnings for many years. While Tesla’s core EV business is without a doubt valuable and profitable, the stock’s price appears to have become largely disconnected from the real-world results of that business.

Sales Appears to Be Flagging

Beyond valuation, Tesla is also starting to see problems in its current financials. Q4 of last year represented the first time in the company’s history that deliveries fell on a year-over-year basis. This problem is expected to persist into 2025, with J.P. Morgan predicting a further decline of 1% compared to 2024.

To some degree, the sales slowdown isn’t surprising. Tesla now faces much more competitive pressure than it did when it first began producing popular EV models, and EVs still account for less than 10 percent of new car sales in the United States. As such, Tesla is fighting for control of a market that hasn’t grown as quickly as many predicted with other large automakers.

Elon Musk Is Doing His Company Few Favors

A final problem for Tesla may be CEO Elon Musk himself. Musk has emerged as a prominent figure within the Trump administration as the head of the Department of Government Efficiency. His political activities, however, have proven polarizing and are likely affecting Tesla sales, especially in international markets. Sales in Europe, for instance, have declined far faster than Tesla’s overall sales, an effect that is widely being blamed on brand damage caused by Musk’s political profile.

A measure of this effect may be visible in the trajectory of Tesla shares since the election, though it’s worth noting that macroeconomic factors and a general stock market selloff are also affecting shares. When Trump was elected, TSLA saw a significant post-election bump associated with Musk’s involvement in the campaign. In the intervening few months, however, the stock has given back essentially all of the ground it gained after the election.

From a purely logistical perspective, it’s also worth noting that having a prominent role in the White House has taken Musk’s focus away from Tesla. Musk himself has acknowledged that it has become extremely difficult for him to run his various businesses and fulfill his role in Washington. A distracted CEO is rarely beneficial for a company’s future, and Tesla may need Musk more actively at the helm at a time when both the company and the stock seem to be running out of steam.

Could Tesla Fall Even More?

Taking all of these aspects of the bear case on Tesla into account, it seems entirely possible that the stock could still have more downside left in it. Weakening consumer demand, sustained inflation and tariffs could all put macro pressure on the company.

Given that the stock still appears significantly overvalued, anything that causes its net income or revenue to deteriorate is likely to trigger further selling. Musk also plans to remain as a figure in government, potentially causing even more brand damage to the company.

As noted above, Tesla’s EV business still has real value. With the stock trading at such astronomical heights on deeply speculative future projects, though, investors are likely paying too much for it. Mounting competition is also likely to pressure that core EV business, potentially curtailing its growth. Overall the bears claim that Tesla doesn’t appear to be a good investment at the moment.