Electric vehicles are not selling well, Tesla is shifting to a new narrative about robots, but can the valuation still hold up?

According to Zhitong Finance APP, Musk is trying to shift Tesla's (TSLA.US) focus from electric vehicles to humanoid robots. However, for skeptical investors, the company's stagnant sales growth and astonishing stock market valuation leave no room for error.

To drive the transformation of this car company into an artificial intelligence (AI) giant, Musk claimed earlier this month on his social media platform X that "about 80% of Tesla's value will come from Optimus" — which is Tesla's robotics research and development project. But this is ultimately a vision for the future. In contrast, Tesla's earnings for 2025 are expected to decline by nearly 30%; its autonomous taxi (robotaxi) business is not only years away from profitability but also faces fierce competition from companies like Waymo, a subsidiary of Google (GOOGL.US).

"Currently, people can assign any valuation to the robotics business," said Thomas Thornton, founder of Hedge Fund Telemetry. "The market has not conducted any substantial research in the robotics field: What companies are currently in this field? What is the level of technology? What is the revenue scale? Is there really market demand for humanoid robots?"

Since 2023, the electric vehicle industry has experienced a comprehensive slowdown in growth, and this trend is expected to worsen in 2024, impacting Tesla's performance. However, at the same time, its stock price has become increasingly high: based on expected earnings over the next 12 months, Tesla's price-to-earnings ratio is about 155 times, a level similar to that during the tech stock boom in 2021 — the year when Tesla's market value first surpassed the trillion-dollar mark, driven by optimistic expectations that electric vehicles would become mainstream.

The Most Expensive Stock

With this valuation, Tesla has become the most expensive company among the "Seven Giants" (which also includes Google, Amazon (AMZN.US), Apple (AAPL.US), Meta (META.US), Microsoft (MSFT.US), and Nvidia (NVDA.US)). The second highest valuation belongs to AI chip giant Nvidia, but its expected price-to-earnings ratio is only 31 times. Among all U.S. listed companies with a market capitalization of at least $100 billion, only Palantir Technologies (PLTR.US) has a higher price-to-earnings ratio than Tesla.

"The valuation level of Tesla is comparable to that of growth companies, but it has achieved almost no meaningful revenue growth in the past two years," said Dmitry Shlyapnikov, an analyst working with portfolio managers at Horizon Investments. "Musk needs to provide investors with a brand new growth story, and Optimus is the answer."

This also explains why Musk's unprecedented trillion-dollar compensation plan heavily relies on the Optimus project. However, given Musk's frequent changes in the company's strategic positioning, it is no wonder that Tesla investors feel bewildered Musk's initial vision was to have Tesla dominate the global electric vehicle market, and he indeed achieved this goal for a time. In April 2024, Musk shifted his focus, declaring that autonomous vehicles would become the core business of the company. Investors welcomed this, driving Tesla's stock price significantly higher.

Subsequently, during the 2024 U.S. presidential election, the CEO fully supported Trump. After Trump's victory, the market anticipated that Musk's close relationship with the new administration would clear obstacles for Tesla's autonomous driving business, which directly triggered a sharp rise in stock prices.

"Musk Risk Exposure"

As of today, Musk has parted ways with Trump, and Tesla's progress in autonomous driving has also faced difficulties. The company encountered setbacks on the first day of launching its autonomous taxi service in Austin—only a small number of vehicles were deployed, yet problems arose continuously; its ride-hailing service launched in California has not yet achieved full autonomy; and expansion into new cities has also been slow. On Thursday, Tesla was approved to begin testing autonomous vehicles in Nevada.

The commercialization path of autonomous driving technology remains fraught with uncertainty, and investor confidence in Tesla's ability to dominate this field is continuously waning.

Meanwhile, Tesla's global vehicle sales continue to decline, coupled with concerns about potential tightening of automotive tariffs, severely impacting its stock price: it has dropped about 25% from the peak in mid-December last year and has remained in a narrow trading range since mid-May this year. As of now, Tesla's stock price has fallen over 10% this year, making it one of the worst-performing 100 companies in the S&P 500 index, while the S&P 500 index has risen by 12% this year.

"The market has never strictly viewed Tesla as just an automotive company, but rather as a bet on Musk's ability to 'turn science fiction into reality,'" said Steve Sosnick, chief strategist at Interactive Brokers. "The previously promised revolution in autonomous taxi services seems insufficient to support its valuation, so turning to humanoid robots is another attempt to achieve this goal."

Whether Musk's renewed focus on the Optimus project can break Tesla's stock price slump remains uncertain—especially since Tesla's core issues seem to lie in the technical realm. For instance, reports this week indicated that Tesla's iconic hidden door handles, mechanical unlocking devices, and power systems could pose "fatal hazards" in collision accidents, potentially making it difficult for drivers and passengers to escape from a burning vehicle.

Of course, for many investors, Tesla's value is not solely dependent on electric vehicle sales or the numbers on financial statements. In their view, investing in Tesla is essentially betting that Musk can continue to create profit growth points amid the waves of transformation in transportation and technology.

"If you firmly believe that Elon Musk is a genius who can change the world through invention, then Tesla is the only choice," said Shlyapnikov from Horizon. "For public portfolios, investing in Tesla is the only way to gain 'Musk risk exposure.'"