Tesla: Strong Narrative vs Weak Fundamentals

Author: Dong Jing

Source: Hard AI

Tesla is simultaneously telling two stories—“AI-driven future growth” and “the reality of a slowdown in the automotive business.” The former ignites stock prices, while the latter undermines profitability.

On October 17, according to Hard AI, Barclays analyst Dan Levy stated in a recent research report that Tesla is caught between "two stories": on one hand, the AI/autonomous driving narrative accelerated by Musk's renewed involvement (new compensation plan, $1 billion stock purchase); on the other hand, the weak fundamentals indicating that third-quarter delivery volumes may have peaked for some time.

The analysts warned that the strong performance in the third quarter is actually a result of "pull-forward demand" before the electric vehicle tax credits expire, which is expected to represent a sales peak for a considerable period. Considering that Tesla's stock price has risen 32% since early September (while the S&P 500 index has only risen 4% during the same period), good news may have already been fully priced in.

The report bluntly stated: “We believe the importance of fundamentals for Tesla investors has become secondary, with the autonomous driving and AI narrative taking center stage... However, the belief that fundamentals do not matter is only temporary—until one day, fundamentals will again become important. The core automotive business is crucial for funding future autonomous driving and AI growth, including the capital-intensive scaling process of Robotaxi."

Barclays maintains a “Neutral rating (Equal Weight)” on Tesla, raising the target price from $275 by 27% to $350, but there is still nearly 20% downside potential compared to the current stock price of $435.

Musk's "Return to Tesla" Ignites Sentiment, AI Narrative Dominates Stock Price

Barclays believes that Tesla's upward momentum comes from “stories” rather than numbers. Musk recently launched a new compensation plan for 2025 and personally purchased $1 billion worth of Tesla stock, which the market interprets as him “refocusing on the company.”

At the same time, the narratives around Robotaxi (autonomous taxis) and the humanoid robot “Optimus” have heated up again, becoming keywords pursued by investors. Despite the company's limited disclosure on these two AI-related businesses, the market continues to drive up valuations based on future potential.

The analysts stated that Tesla is attracting capital with “Mars-shot milestones”—grand visions that are far from profitability.

Sales Peaking, Profits Under Pressure: Reality is Pulling Down the “Myth”

Behind the frenzy in the capital markets, Tesla's operational reality is cooling down.

Barclays expects the company's third-quarter earnings per share (EPS) to be around $0.60, higher than the market expectation of $0.52, but this has already been priced in by the stock. The key risk is that starting in the fourth quarter, both sales and profits may decline simultaneously. Sales may have peaked: Deliveries in the third quarter reached 497,000 units, marking a temporary high point. With the expiration of the $7,500 tax credit for electric vehicles in the U.S., fourth-quarter sales are expected to drop to 425,000 units, with annual deliveries around 1.64 million, a year-on-year decline of 8%, marking the second consecutive year of decline.

New models lack surprises: The newly launched "low-priced version" of Model 3/Y is not an entirely new model, but rather a simplified version of the existing ones (with reduced features and lower battery capacity). Analysts point out that these models may primarily "cannibalize" sales of existing high-end models, bringing limited new demand.

"We are disappointed with the new car releases, as we had hoped to see more product diversity... Investor feedback on the releases has generally been negative, with many expecting more clarity on profitability during the earnings call."

Profitability continues to decline: Barclays expects Tesla's EPS for 2025 and 2026 to be $1.61 and $1.48, respectively, both below market expectations ($1.75 and $2.46). Gross margins are expected to remain under pressure, declining from 29% in 2022 to around 16% in 2025.

Logic Behind the Target Price Increase

Tesla's market capitalization currently stands at $1.45 trillion, with an enterprise value to EBITDA ratio as high as 125.8 times (expected for 2025), far exceeding traditional automakers. This valuation is entirely based on optimistic expectations for autonomous driving and artificial intelligence, rather than current fundamentals.

Despite weak fundamentals, Barclays has raised Tesla's target price by 27% to $350, but this mainly reflects a valuation adjustment for AI/autonomous driving opportunities (the base case P/E ratio increased from 41 times to 65 times), rather than an acknowledgment of fundamental improvement, and the current stock price of $435 still has about 20% downside potential.

Additionally, Barclays holds a neutral to slightly negative view around the release of the third-quarter earnings report. The reasoning is that the significant rise in stock price has fully reflected performance expectations, while the earnings report may remind the market of the weak fundamentals post-third quarter. However, the firm also emphasized that any stock price pullback may be temporary, as the shareholder meeting on November 6 could reignite market enthusiasm for the growth narrative.