Tesla's FSD Legal and Reputational Risks: A Looming Storm for Long-Term Investors?

Tesla's Full Self-Driving (FSD) technology has long been the crown jewel of its AI-driven growth narrative, promising to transform the company into a mobility-as-a-service giant. Yet, as the company races toward its vision of autonomous ubiquity, a storm of legal and reputational risks is gathering. From class-action lawsuits to regulatory investigations and mounting consumer skepticism, Tesla's FSD ambitions are now entangled with a web of challenges that could undermine its long-term value proposition—and investor confidence.

The Legal Quagmire: Misaligned Marketing and Consumer Trust

At the heart of Tesla's legal troubles lies a fundamental disconnect between its marketing claims and the reality of FSD's capabilities. In August 2025, U.S. District Judge Rita Lin allowed a California class-action lawsuit to proceed, accusing Tesla of misleading consumers who purchased FSD software between 2016 and 2024. The lawsuit argues that Tesla's marketing—via Elon Musk's public statements, blog posts, and website copy—created a “reasonable belief” that its vehicles could operate fully autonomously, despite lacking the hardware (e.g., advanced sensors) and software maturity to deliver on those promises.

This misalignment has not gone unnoticed by regulators. California's Department of Motor Vehicles is suing Tesla for allegedly misleading consumers about Autopilot and FSD, with potential penalties including a 30-day sales suspension. Meanwhile, the National Highway Traffic Safety Administration (NHTSA) has launched multiple investigations, including a 2025 probe into Tesla's delayed crash reporting for FSD-related incidents. These actions highlight a growing judicial and regulatory consensus: Tesla's marketing may be creating a “false sense of security” among drivers, with real-world consequences.

Market Reactions: A Stock Under Pressure

The financial markets have responded to these risks with skepticism. Tesla's stock, which once traded at a stratospheric valuation, has lost over 50% of its value since 2024. A pivotal moment came in June 2025, when a Bloomberg report revealed that Tesla's autonomous vehicles were violating traffic laws, triggering a 6% two-day drop in its stock price. This volatility reflects investor concerns about Tesla's ability to navigate legal and regulatory hurdles while maintaining its growth trajectory.

Analyst sentiment is similarly divided. While bullish voices like Wedbush's Dan Ives remain optimistic about Tesla's robotaxi ambitions, bearish analysts such as UBS's Joseph Spak argue that the stock is overvalued and driven by hype rather than fundamentals. As of Q3 2025, the average 12-month price target for Tesla stands at $293.67, implying modest downside from its current price of $322. The lack of consensus underscores the uncertainty surrounding Tesla's FSD roadmap and its ability to address safety and regulatory concerns.

Reputational Damage and the Cost of Overpromising

Tesla's reputation as a technological innovator is also at risk. The 2024 Miami jury verdict in Benavides v. Tesla, which awarded $243 million in a fatal Autopilot crash case, has set a precedent for holding automakers accountable for marketing claims. Meanwhile, public test footage of Tesla's Robotaxi program—showing vehicles speeding and making illegal turns—has fueled criticism about the company's safety protocols. These incidents have eroded consumer trust, particularly as Tesla's FSD rollout faces delays and technical limitations.

The reputational fallout extends beyond consumers. Shareholders are now filing class-action lawsuits, accusing Tesla and Musk of overstating the effectiveness of FSD and failing to disclose material risks. These legal battles could strain Tesla's cash reserves, diverting resources from R&D and expansion. For a company that relies on its AI-driven narrative to justify its valuation, the cost of overpromising is becoming increasingly tangible.

Strategic Implications for Investors

For long-term investors, Tesla's FSD challenges raise critical questions:
1. Can Tesla recalibrate its marketing strategy to align with regulatory expectations? The company's reliance on Musk's aspirational rhetoric has backfired, and a shift toward transparent, cautious messaging may be necessary to rebuild trust.
2. How will regulatory outcomes shape Tesla's compliance costs and operational flexibility? A potential sales suspension in California or stricter NHTSA requirements could delay FSD's commercialization, directly impacting revenue projections.
3. Is Tesla's governance model equipped to handle the pressures of high-growth tech? The board's current structure, dominated by Musk's vision, may lack the checks and balances needed to address legal and safety risks effectively.

Investors should monitor Tesla's governance reforms, regulatory compliance efforts, and the outcomes of ongoing lawsuits. Diversifying exposure to other autonomous vehicle players with stronger regulatory track records—such as Waymo or Rivian—could also mitigate sector-specific risks.

Conclusion: Navigating the Storm

Tesla's FSD technology remains a transformative force in the automotive industry, but its legal and reputational risks cannot be ignored. The lawsuits, regulatory scrutiny, and misaligned marketing claims are not isolated incidents—they are symptoms of a broader challenge: balancing innovation with accountability. For investors, the key will be to weigh Tesla's long-term potential against the immediate uncertainties. While the company's AI-driven vision is compelling, the path to realizing it is now fraught with obstacles that demand careful navigation.

In the end, Tesla's ability to weather this storm will depend on its willingness to adapt. For now, the storm clouds loom large—and investors would be wise to prepare accordingly.