Tesla's FSD Under Scrutiny: Regulatory Risks and Stock Valuation Implications

The National Highway Traffic Safety Administration (NHTSA) has intensified its scrutiny of Tesla's Full Self-Driving (FSD) system, launching an investigation into 2.9 million vehicles equipped with the technology due to reports of traffic violations, crashes, and injuries, according to USA Today. This follows a prior 2024 probe into 2.4 million Tesla vehicles linked to similar safety concerns, including a fatal pedestrian collision, reported by AP News. The latest investigation, which includes models from 2016 to 2026, has raised urgent questions about the reliability of FSD and the adequacy of Tesla's safety protocols.

Regulatory Pressures and Safety Concerns

According to Investing.com, the NHTSA probe centers on incidents where Tesla vehicles operating in FSD mode ran red lights, changed lanes into oncoming traffic, or failed to detect obstacles, resulting in six documented crashes and 23 injuries. Tesla has defended the system, saying drivers must remain attentive and ready to intervene, per StockAnalysis. However, critics argue that the recurring safety issues-despite software updates-highlight systemic flaws in the FSD hardware and software integration, as Reuters reported. Analysts from firms like Baird and Goldman Sachs have called for stricter regulatory oversight or hardware upgrades to address these risks, according to Nasdaq.

The regulatory environment has also shifted as Tesla's traditional revenue streams, such as regulatory credits from clean vehicle programs, face diminishing returns, per Benzinga. This adds financial pressure to a company already navigating slowing sales growth and margin compression.

Investor Confidence and Stock Performance

The October 2025 investigation initially triggered a 2.1% drop in Tesla's stock price, according to Invezz, reflecting investor unease. Yet, the stock has since rebounded sharply, surging 28.66% over the past 30 days, as shown on MarketBeat. This resilience has been attributed to Elon Musk's $1 billion share purchase, which many interpreted as a strong endorsement of Tesla's long-term prospects, according to Forbes. Analysts like Wedbush's Daniel Ives and TD Cowen's Jeff Osborne have maintained or upgraded their price targets, with Ives setting a $600 target and Osborne raising his to $509, as noted by StockAnalysis.

Despite the regulatory headwinds, 47 financial analysts surveyed in September 2024 maintained an average 12-month price target of $233.14, with a mix of bullish, bearish, and neutral ratings, according to the Nasdaq survey. This suggests that while short-term risks persist, the market remains cautiously optimistic about Tesla's ability to innovate and adapt.

Long-Term Growth and Strategic Risks

The FSD investigations underscore a critical tension between technological ambition and regulatory caution. While Tesla's Autopilot and FSD systems have positioned the company as a leader in autonomous driving, repeated safety incidents risk eroding consumer trust and inviting more stringent oversight. For instance, the NHTSA's expanded probe could lead to mandatory hardware retrofits or software restrictions, increasing costs and delaying FSD's commercial rollout, as reported by StockTwits.

Conversely, Tesla's recent stock rally indicates that investors are prioritizing long-term growth potential over near-term risks. The company's dominance in EV production, global manufacturing scale, and Musk's strategic investments signal confidence in its ability to navigate regulatory challenges. As Goldman Sachs noted in a recent analysis, Tesla's "first-mover advantage in autonomous technology" remains a key differentiator, even amid scrutiny, according to StockInvest.us.

Conclusion

Tesla's FSD technology represents both a transformative opportunity and a regulatory minefield. While the NHTSA investigations highlight legitimate safety concerns and potential financial headwinds, the stock's recent performance and analyst optimism suggest that investors are betting on Tesla's resilience. The coming months will test this balance: if regulatory actions force costly delays or hardware upgrades, they could dampen investor enthusiasm. However, if Tesla successfully refines its FSD system and maintains its technological edge, the company could emerge stronger, reinforcing its position as a cornerstone of the EV and AI revolutions.