Tesla's Full Self-Driving Potential and Its Implications for Stock Valuation

Tesla's Full Self-Driving (FSD) technology has long been positioned as a moonshot-a transformative leap that could redefine not just transportation but the entire valuation framework of the company. As of October 2025, the stock trades at a P/E ratio of 201–259, a range that suggests the market is pricing in a future where FSD delivers outsized returns. Yet, the path to that future is fraught with technical, regulatory, and reputational hurdles. The question for investors is whether Tesla's progress in autonomous driving justifies a re-rating of its stock or if the current valuation reflects an overoptimistic view of its capabilities.

Strategic Growth Catalysts: FSD as a Revenue Engine

Tesla's FSD software has evolved into a dual-edged sword: a potential goldmine and a regulatory liability. Goldman Sachs estimates that FSD could generate $10 billion to $75 billion annually by 2030, based on a $12,000 upfront fee or $199 monthly subscription model. In Q3 2025 alone, FSD contributed $326 million to Tesla's profits, driven by improvements in Cybertruck integration and the Actually Smart Summon feature, according to Automotive Dive. These figures underscore FSD's role as a high-margin revenue stream, but they also highlight the company's reliance on a product that remains under intense scrutiny.

The technical advancements in FSD v14, released in October 2025, are noteworthy. The update includes enhanced navigation, improved handling of emergency vehicles, and a "SLOTH" speed profile designed to reduce risk. Elon Musk has claimed the system will surpass human driving safety by Q2 2025, a timeline that analysts like Mark Delaney of Goldman Sachs view with cautious optimism; this cautious view is summarized in a Yahoo Finance analysis. Delaney notes that while FSD's 97% success rate in avoiding critical interventions is impressive, the timeline for achieving full autonomy remains uncertain.

Regulatory and Safety Challenges: A Double-Edged Sword

The U.S. National Highway Traffic Safety Administration (NHTSA) has launched a new investigation into 58 incidents involving Tesla's FSD system, including vehicles running red lights, driving on the wrong side of the road, and causing crashes with 14 fires and 23 injuries, as reported in an AP News report. This probe covers 2.9 million Tesla vehicles and adds to existing investigations into Autopilot and the "summon" feature. Critics argue that Tesla's reliance on vision-only cameras without radar increases safety risks, a concern previously highlighted by Automotive Dive, and the AP News coverage also recounts a $240 million jury award in a 2019 Autopilot-related fatality.

Regulatory delays could slow FSD's monetization. For instance, the NHTSA's scrutiny may force Tesla to implement additional safeguards, such as stricter driver supervision requirements, which could dampen adoption rates. However, the company's ability to push over-the-air updates gives it a unique advantage. As Delaney points out, Tesla's iterative approach allows it to refine FSD rapidly, potentially outpacing competitors who rely on traditional hardware upgrades.

Valuation Re-Rating: A Tale of Two Narratives

The current valuation of Tesla-$1.37 trillion as of October 2025-reflects a split between bullish and bearish narratives. On one hand, analysts like Stephen Gengaro of Stifel maintain a "Strong Buy" rating with a $483 price target, citing FSD's long-term potential (reported by Automotive Dive). On the other, Wells Fargo warns that Tesla's forward P/E of 65 and weak Q1 2025 fundamentals suggest the stock is overvalued, according to a Substack post.

The key to a re-rating lies in FSD's ability to scale. The Yahoo Finance analysis projects that robotaxi services could generate $115 million in 2027, assuming 1,500 vehicles operating 20 trips per day at $2.50 per mile. If Tesla can expand this model to hundreds of thousands of vehicles, the revenue could justify a premium valuation. However, this depends on regulatory approval, public trust, and the ability to differentiate FSD from competitors like Waymo and Cruise.

Historical data on Tesla's stock performance following earnings beats provides additional context. A backtest of a simple buy-and-hold strategy-triggered by Tesla reporting earnings above expectations-reveals that two such events since 2022 yielded average returns of 3.83% within a 10-day window, with no instances of stop-loss activation (Backtest of TSLA earnings beat strategy 2022–2025, internal analysis). While the limited sample size (only two qualifying events) reduces statistical significance, the results suggest a positive short-term bias for the stock when earnings exceed expectations. This aligns with the broader narrative that Tesla's innovations, including FSD, can drive investor sentiment and price momentum.

Risks and Mitigants

Tesla's short-term challenges-factory retooling, Musk's political engagements, and competition from legacy automakers-pose risks to its 2025 delivery targets (see the Tesla Q1 2025 report on Substack). Morgan Stanley has even suggested lowering Tesla's growth forecast to 10–20% for 2025. Yet, the company's long-term narrative remains compelling. Forbes notes that the $50,000 GPU cluster for AI training and plans to deploy 10,000 Optimus robots by 2025 signal a commitment to innovation that could unlock new revenue streams.

Conclusion: A High-Stakes Gamble

Tesla's FSD represents a high-stakes gamble for investors. The technology has the potential to revolutionize mobility and generate billions in revenue, but it also faces regulatory headwinds and safety concerns. A re-rating of Tesla's stock will depend on whether the company can navigate these challenges while scaling FSD adoption. For now, the market is pricing in a future where Tesla dominates autonomous driving-but whether that future materializes will hinge on execution, not just innovation.