Key Takeaways
- Tesla’s valuation continues to reflect a significant narrative premium, which is being tested by weakening fundamental metrics and slowing growth.
- The stock’s volatility is increasingly driven by unquantifiable factors, including CEO sentiment and headline risk, making traditional valuation models less reliable.
- A direct comparison of operational performance reveals intensifying pressure from competitors like BYD, which exhibits stronger growth and more modest valuation multiples.
- Automotive gross margins, a key indicator of profitability and pricing power, have compressed, calling into question the sustainability of Tesla’s premium market position.
Tesla’s stock continues to be a battleground where a potent, long-term narrative collides with observable, near-term fundamentals. Any significant price movement, such as its periodic flirtations with psychological thresholds like the $300 level, often has less to do with a single catalyst and more with the market’s perpetual struggle to price a company that is part automaker, part technology venture, and part sentiment barometer. While external noise, including the chief executive’s public pronouncements, can act as a trigger for volatility, the more enduring question for investors centres on whether the company’s valuation can withstand a period of decelerating growth and intensifying competition.
The Widening Gulf Between Narrative and Numbers
For years, the investment case for Tesla was built upon a foundation of exponential growth, technological supremacy, and the promise of future revenue streams from autonomous driving and robotics. This narrative justified a valuation that decoupled from legacy automotive peers. However, recent performance has introduced a measure of dissonance. The company’s first quarter of 2024 saw a 9% year-on-year decline in revenues, a notable departure from its history of rapid expansion.1
More critically, automotive gross margins, a metric scrutinised for evidence of pricing power and production efficiency, have shown signs of strain. After falling significantly through 2023, the margin (excluding regulatory credits) stood at 16.4% in the first quarter of 2024. While this figure may be respectable for a conventional car manufacturer, it represents a marked contraction from the high twenties seen in previous years, reflecting a strategy of price reductions aimed at stimulating demand in a more crowded market.
A Sobering Peer Review
The argument for Tesla’s exceptionalism becomes more difficult to sustain when placed in direct comparison with its most formidable global competitor, BYD Company. While Tesla’s deliveries declined year-on-year in the first quarter, BYD has continued its ascent, becoming the world’s largest seller of electric vehicles. The financial metrics underscore this divergence in trajectory and valuation.
| Metric | Tesla (TSLA) | BYD Company (002594.SZ) | Rivian (RIVN) | Volkswagen AG (VOW3.DE) |
|---|---|---|---|---|
| Market Capitalisation (Approx.) | $580 billion | $95 billion | $11 billion | $65 billion |
| Price/Earnings (TTM) | ~45x | ~20x | N/A | ~4x |
| Revenue Growth (Q1 2024 YoY) | -9% | +4% | +82% | -1% |
| Q1 2024 BEV Deliveries Change (YoY) | -8.5% | +13% | +71% | -3% |
Note: Figures are approximate, based on data reported in or around Q1 2024. Market capitalisation is as of mid 2024.
The data paints a clear picture: investors are paying more than double the earnings multiple for Tesla compared to BYD, despite the latter demonstrating more resilient growth in the recent period. Rivian, whilst still deeply unprofitable, is showing the rapid delivery growth characteristic of an early-stage manufacturer, something Tesla’s own growth has now moved past. Meanwhile, legacy giants like Volkswagen are valued as conventional industrial firms, highlighting the immense growth premium still baked into Tesla’s share price even after its recent pullbacks.
Pricing the Unquantifiable Risk
This brings the analysis back to the intangible factors. It is undeniable that a significant portion of Tesla’s valuation is tied to the market’s belief in its long-term bets on full self-driving (FSD) software, the Optimus robot, and its energy storage business. These are difficult, if not impossible, to value using conventional discounted cash flow analysis, forcing investors to rely on narrative and conviction.
This reliance, however, comes with inherent volatility. The company’s fortunes and its stock price are inextricably linked to its chief executive, whose actions and public statements can influence sentiment far more than a quarterly earnings report. This creates a unique form of event risk that is a permanent feature of the investment thesis, one that can amplify both gains and losses.
For allocators, the challenge is not simply to determine if Tesla is overvalued, but rather to decide how much of a premium one is willing to pay for its future potential and how to hedge the associated narrative risk. The slowing of the core automotive business makes this calculation more acute. A speculative hypothesis for the future is that the market may begin to subconsciously apply a “conglomerate discount” to Tesla. It could start valuing the automotive business on metrics closer to industry peers, while treating the technology ventures as a separate, venture-capital-style call option. The primary source of volatility, therefore, would be the constant re-pricing of that speculative option, rather than the performance of the car company itself.
References
1. Tesla, Inc. (2024, April 23). Q1 2024 Update. Retrieved from Tesla Investor Relations.
2. Reuters. (2024, April 29). China’s BYD posts 10.6% rise in Q1 profit as EV sales boom. Retrieved from Reuters.
3. Rivian Automotive, Inc. (2024, May 7). Q1 2024 Shareholder Letter. Retrieved from Rivian Investor Relations.
4. Volkswagen Group. (2024, April 30). Interim report January March 2024. Retrieved from Volkswagen Group Investor Relations.
