Tesla (NASDAQ:TSLA) stock has been hammered in recent weeks. On 21 January, the day after the US President Trump’s inauguration, Tesla stock was trading for $424. At the time of writing, the stock is at $258. This means the stock is down 39% over the six-week period. As such, a £10,000 investment then would be worth just £6,100 now. In fact, given the appreciation of the pound over the period, the forex-adjusted figure would be closer to £5,700. It goes without saying, but this would be a very disappointing investment outcome.
So, why has it happened?
Tesla boss Elon Musk has a position within the new administration and seemingly the ability to exert influence government policy. This may have buoyed some retail investors following Trump’s election, but the excitement is fading. And there are more factors at play.
Deteriorating fundamentals paint a worrying picture
The latest figures show Tesla’s fundamentals are deteriorating. Analysts have drastically cut 2025’s earnings per share forecast to just $2.85, which is a staggering 66% lower than estimates from two years ago and 12% below mid-January projections. Revenue estimates have been revised down by $4.3bn to $112bn.
Adding to investor concerns, three Tesla insiders — including Elon’s brother Kimbal — have planned significant stock sales for 2025 worth approximately $300m. These planned sales, while scheduled in advance, are bound to harm investor confidence.
Valuation remains stratospheric despite decline
Despite the recent pullback, Tesla’s valuation metrics remain eye-popping. The current price-to-earnings (P/E) ratio stands at 108 times, based on trailing 12-months earnings of $2.23 per share. While this represents a 21% discount to Tesla’s five-year historical average P/E of 138 times, it’s still dramatically higher than competitors and other tech giants.
Meanwhile, Tesla’s P/E-to-growth ratio, which measures price relative to earnings growth, sits at 6.6 —significantly better than it was a couple of months ago, but still vastly elevated compared to traditional automakers and other technology and even AI companies.
Margin compression threatens growth story
Tesla’s operating margin has contracted alarmingly — from a peak of 16.8% in 2022 to just 7.2% in 2024, with Q4’s margin falling to 6.2%. This margin erosion reflects intense pricing pressure and the company’s struggle to maintain profitability while pursuing affordability. The automotive gross profit situation is particularly concerning. In Q4 2024, Tesla generated $3.29bn in automotive gross profit, less than it produced in Q3 2021 ($3.67bn) with half the deliveries. This dramatic efficiency decline explains why Tesla’s earnings power has weakened despite increased deliveries.
The verdict: proceed with extreme caution
Tesla remains a polarising investment. Bulls point to upcoming projects like the Robotaxi pilot in Austin this June, while bears highlight the company’s valuation disconnect, declining margins, and management’s tempering of growth expectations.
Though Musk has called 2025 Tesla’s “most pivotal year,” the realities of slowing growth and intensifying competition suggest investors should approach with extreme caution. What’s more, with Musk distracted by DOGE and SpaceX, among other things, Tesla’s AI future (Robotaxis and robotics) isn’t being sold as well as it has been.
Despite my personal appreciation for Tesla as a brand, at current levels, the stock’s risks simply outweigh the potential rewards. I will not be adding the shares to my portfolio.
