Is Tesla's Core EV Business a Dying Engine for Growth?

Tesla's electric vehicle (EV) business, once the uncontested engine of growth for the EV revolution, is showing signs of strain. A 15% year-over-year decline in Q4 2025 deliveries-projected at 422,850 units compared to 495,570 in Q4 2024-has sparked renewed scrutiny over the sustainability of its core automotive operations. This decline, driven by the expiration of U.S. EV tax credits, aggressive competition from Chinese automakers, and supply chain disruptions, raises critical questions about Tesla's ability to fund its ambitious AI-driven future. As investors weigh near-term risks against long-term bets on Full Self-Driving (FSD) and robotaxis, the company's strategic dependency on a faltering EV business becomes a focal point for valuation risk.

The EV Delivery Decline: A Perfect Storm of Market and Policy Shifts

Tesla's Q4 2025 delivery slump is emblematic of broader industry headwinds. The loss of the $7,500 U.S. federal EV tax credit at the start of 2025 directly impacted demand, with Q3 2025 sales surging as buyers rushed to secure incentives before their expiration. Meanwhile, Tesla's attempt to offset this with cheaper, feature-limited versions of the Model 3 and Model Y-priced $5,000 below base models-failed to reignite demand. These models lack key features like Autopilot, diluting the value proposition for tech-savvy buyers.

Global competition has further eroded Tesla's dominance. Chinese EV manufacturers, leveraging cost advantages and rapid innovation cycles, have captured market share in Europe and the U.S. Analysts note that Tesla's production retooling for the redesigned Model Y earlier in 2025 also disrupted output, exacerbating the delivery shortfall. The result: a 15% Q4 decline and an 8% full-year drop in 2025 deliveries, marking the automaker's second consecutive year of sales contraction.

Supplier Cuts and Financial Pressures: A Warning Signal

The strain on Tesla's EV business is not just a sales issue-it's a systemic one. A stark example is the 99% reduction in a $2.67 billion battery contract with South Korean supplier L&F Co., now slashed to $7,386. This move reflects shifting supply chain dynamics and Tesla's pivot toward in-house battery production, but it also underscores the fragility of its current financial model.

Financially, Tesla's 2024 results reveal a growing imbalance. While revenue hit $97.69 billion, net income fell 52.46% to $7.13 billion, driven by a 5.01% revenue allocation to R&D-up sharply from previous years. This spending, directed toward AI infrastructure like the Dojo supercomputer and Optimus robot, has narrowed operating margins to 7.24% in 2024 from 9.19% in 2023. With Q2 2025 automotive revenue dropping 16% year-on-year to $16.6 billion, the company's ability to sustain such R&D investments is increasingly precarious.

AI and Robotaxis: A Long-Term Bet or a Distraction?

Despite these challenges, Wall Street remains divided on Tesla's AI-driven future. Wedbush's Dan Ives and Morgan Stanley's analysts project a $3 trillion valuation by 2030, hinging on robotaxi networks and FSD licensing generating up to 40% of operating income. Tesla's cost advantage in autonomous driving-$0.59 per mile compared to Waymo's $1.20-further fuels optimism. However, skeptics like Morningstar's Seth Goldstein argue that robotaxi scalability will take years to materialize, and the current stock price reflects overly optimistic assumptions.

The divergence in analyst expectations highlights a critical risk: Tesla's AI initiatives may require years of negative cash flow before generating returns. With Q4 2025 automotive revenue projected to fall by more than half, the company's ability to fund these projects without diluting shareholder value or cutting R&D budgets is uncertain. Elon Musk's assertion that robots will comprise 80% of Tesla's value appears aspirational at a time when the core EV business is hemorrhaging growth.

Strategic Dependency and Valuation Risk: A Tipping Point?

Tesla's strategic dependency on its EV business creates a paradox. The company's AI ambitions rely on cash flows from a segment now in decline, while its EV market share is being eroded by rivals offering cheaper, more feature-rich alternatives. Deutsche Bank's Edison Yu and others remain bullish, citing the potential of FSD and robotaxis to unlock new revenue streams. Yet, the recent cancellation of the affordable Model 2.5 and delays in the Optimus robot project suggest execution risks that could delay these monetization timelines.

For investors, the question becomes whether to prioritize near-term stabilization-such as reinvigorating the core EV business with a new affordable model in 2025-or bet on Musk's long-term vision. The former requires addressing immediate challenges like supply chain bottlenecks and pricing strategies, while the latter demands patience as AI initiatives mature.

Conclusion: A Crossroads for Tesla and Its Investors

Tesla stands at a crossroads. Its EV business, once the bedrock of growth, is now a source of strategic risk. The 15% Q4 delivery decline, supplier cuts, and divergent analyst projections underscore the fragility of its current model. While AI and robotaxis offer transformative potential, their success hinges on Tesla's ability to stabilize its automotive operations and maintain R&D funding amid declining sales.

Investors must weigh these factors carefully. Near-term stabilization efforts could restore confidence in the core business, but they may come at the expense of long-term innovation. Conversely, doubling down on AI risks exacerbating short-term financial pressures. In a market where valuation is increasingly tied to speculative bets, Tesla's ability to balance these priorities will determine whether it remains a growth engine-or becomes a cautionary tale of overreliance on a fading core business.