Tesla’s (NASDAQ:TSLA) dominance is no longer guaranteed and that creates huge risk for its stock. Its Chinese rival BYD outsold Tesla in terms of EV deliveries in Q1 2025. At the same time, Tesla’s stock is down more than 40% year-to-date, and that brings us to an important question – whether the long-rumored $25,000 mass-market EV – now likely to come in the form of an autonomous Cybercab – is going to be good enough? With margins shrinking and global competition heating up, the company faces a brutal crossroad: execute flawlessly, or watch its valuation sink by another 50%. Separately, Microsoft has been improving. See: Microsoft Quietly Gearing Up For A $500 Breakout?
Despite its amazing tech, product, and massive stock returns – Tesla has been a volatile stock historically. We don’t chase returns. We minimize risk and returns take care of themselves. Individual stock volatility is one of the risk factors we consider in our High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Let’s look into the numbers and assess the crossroad that Tesla is at.
However, the average selling price (ASP) of BYD vehicles is $15,000–$20,000, while Tesla’s ASP still hovers around $39,000–$45,000 depending on the model and geography. But BYD’s margin is rapidly catching up while Tesla’s operating margin in Q1 2025 declined to 6.2% vs 8.2% a year ago.
Cybercabs Can Add $150 Billion In Value
Elon Musk has suggested that Tesla’s next-gen platform will cut production costs by 50%. Assuming this is true, here is an optimistic scenario of how this might evolve:
- Tesla manages operating margin of 10% for its lower priced Cybercabs
- Manages to reach its target of producing 2 million units annually
- That adds nearly $50 billion in revenue, and $5 billion in operating income
- Tesla is priced at P/EBIT ratio of >100 right now but we all know that is not sustainable
- At a more reasonable multiple of 30x, $5 bil in operating income translates to $150 billion in value or almost 20% of Tesla’s current market cap.
That new model could boost Tesla’s total unit sales and market value, but it relies on massive scale and efficient execution. If the cost savings fall short or demand softens, Tesla risks eroding margins further – especially while competing against BYD’s existing low-cost infrastructure.
But Tesla’s Valuation Still Assumes Dominance
Look at this. Tesla’s revenue growth is taking a hit. From the 3-year average of almost 24%, it dropped massively to <1% in the past 12 months. That’s a huge growth shock and the stock price plummeting reflects that. Seems to us that Tesla’s market multiples – with nearly 100x PE – ignore reality and rather still assume world dominance. Nothing could be further from the truth and BYD is proving that.
What does this mean? Tesla is at a tipping point. Underperform a couple more quarters and the stock plummets – even 30-50% is in the cards. In fact, the competition from BYD is so fierce that Tesla has asked India’s help to chip in with supply of integral parts.
Tesla is a classic example that – no matter how good the past returns are, and no matter how exceptional the company is in terms of product and operations – the market can be brutal. Investing in a single stock is a risky endeavor. If you want to diversify that risk and still be exposed to the upside, consider investing in the Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Invest with Trefis
Market Beating Portfolios | Rules-Based Wealth
Read the full article here
