Elon Musk’s renewed focus on Tesla temporarily boosted shares, but the company faces mounting challenges. This includes steep sales declines in Europe, intensifying competition, and potential loss of key EV tax credits. In today’s FA Alpha Daily, we explore why even Musk’s return may not be enough to support Tesla’s sky-high valuation.
FA Alpha Daily
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Elon Musk’s recent announcement that he will reduce his political involvement to concentrate more on Tesla (TSLA) has provided a temporary lift to the company’s shares, which saw a rise of over 6% following the news.
This move comes as the electric vehicle maker confronts more and more issues.
In April 2025 alone, Tesla’s sales in Europe fell by a staggering 49% year-over-year, with only 7,261 vehicles sold.
This decline is particularly concerning as there was a 34% overall increase in EV sales across the region during the same period.
This shows Tesla is not only facing a general market slowdown but is also losing ground to competitors.
In the United States, the brand has faced headwinds stemming from Musk’s political activities, which appear to have alienated a segment of potential buyers.
Beyond consumer sentiment, Tesla faces the potential loss of the $7,500 federal tax incentive for EV purchases, a program from which it has significantly benefited from. The elimination of this credit could further dampen demand.
Competition is also intensifying, with Ford’s F-150 Lightning recently surpassing the Tesla Cybertruck as the best-selling EV pickup in the country. Inventory levels for the Cybertruck are reportedly at record highs.
Tesla’s first-quarter earnings for 2025 already reflected these struggles, with revenues declining 9% year-over-year to $19.3 billion, missing analysts’ expectations.
Vehicle deliveries also fell, and the average selling price per vehicle decreased. April’s delivery numbers suggest that the second quarter may also underperform expectations.
Despite all these issues, Musk’s renewed commitment to Tesla is undoubtedly a positive signal for investors. There are also other potential tailwinds.
Discussions around tariff relief for the auto industry could prevent significant cost increases for Tesla.
The company is also making strides in its autonomous driving projects, with the recent easing of some safety rules by the National Highway Traffic Safety Administration (NHTSA) potentially accelerating the rollout of its robotaxi fleet.
Musk has ambitious plans to scale a fleet of autonomous Model Y taxis to millions of vehicles by the end of next year, which could open up new revenue streams.
However, these potential upsides may not be sufficient to offset the current sales and competitive pressures. The company is losing market share in a growing EV sector.
A core issue for investors is Tesla’s high valuation. The stock continues to trade at 180x Uniform P/E, with expectations for growth that are not supported by recent results.
Tesla’s Uniform return on assets ”ROA” was around 11% in 2024, not that impressive for the company’s performance during the pandemic and hardly supports such a steep multiple.
The market clearly believes nothing short of perfection will justify that price.
We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market expects the company’s Uniform ROA to increase sixfold to around 60% from 11% last year.
While Musk’s return to a more hands-on role at Tesla is a development investors have welcomed, the path to satisfying the market’s lofty expectations will be difficult.
The company faces significant challenges in key markets, growing competition, and the lasting effects of brand damage.
Turning the tide will require more than just Musk’s increased presence, it will demand a substantial improvement in sales and a clear strategy to navigate the increasing competition.
Investors should be careful when investing in a company with an uncertain future and lofty valuation.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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