“2025 marked a critical year for Tesla (NASDAQ: TSLA) as we further expanded our mission and continued our transition from a hardware-centric business to a physical AI company”, the company said in its full-year results last week. Tesla stock moved down following the publication of the results, but by a fairly modest amount rather than like a brick. The share price is now 7% below where it began the year, but 4% up over the past 12 months.
In other words, the market did not seem dramatically bothered that Tesla is transitioning from a “hardware-centric business” (I think this means a carmaker to you or me) to a “physical AI” business (whatever that is).
But I reckon that could have significant impact on what a long-term fair value for Tesla stock might be.
Not standing still
Tesla has made its reputation building electric vehicles. That has also given it expertise in storing power, so on the side it has also developed a significant large-scale power generation and storage business.
But it has long fancied itself as a putative AI company. That has manifested itself in various iterations of self-driving software. That in turn has underpinned hopes of self-driving taxis: long touted, but still not delivered on a commercial basis at scale.
With its latest results, Tesla aims to reposition itself more as an AI company that has hardware-building capabilities to support the use of such AI.
There is some credibility to this in my view, despite the hyperbolic language. Tesla has software expertise and has long been applying it to vehicles. The self-driving taxi rollout has been slow but is making progress.
Lots still to prove
However, so far, Tesla’s AI capabilities remain to be proven.
The self-driving taxi rollout to date is basically a trial. Robotics development is also at a relatively early stage given the amount of work needed for successful commercialization at scale.
Meanwhile, company revenues declined last year on the back of a 10% decline in automotive revenues. Operating margin declined sharply and, at 4.6%, was a far cry from the 16.8% achieved in 2022, since when it has fallen annually.
Net income attributable to common stockholders almost halved (using Generally Accepted Accounting Principles as the basis of preparation).
Net cash provided by operating activities also nudged down a smidgen, though a strong improvement in free cash was a bright spot.
Clearly, the car division’s challenges have dragged down the whole performance given its dominant size; energy generation and storage revenues improved by 27%.
An evolving narrative
Yet the company’s strategic response is to position itself more as an AI play and less as a carmaker.
If that works, perhaps the current Tesla stock price could end up being justifiable. Tesla does have engineering expertise and proven sales capability.
But AI is a crowded space. Even some of Tesla’s automotive rivals have as much right to win as it does, in my view: BYD is doing well and outselling Tesla handily. It is also developing its AI capabilities.
To me, Tesla stock looks wildly overpriced at 388 times earnings. I see it as a car company struggling with increased competition and the end of key US buyer subsidies.
Some AI dreams sprinkled on top still cannot justify it, in my view. I have no plans to invest.
