Tesla Stock Defies Gravity as Earnings Slide and Analysts Question Valuation

Tesla's recent market performance has left analysts puzzled, as the company's valuation seems to have disconnected from its fundamentals. Although Tesla's 2024 fiscal year earnings were below consensus expectations, its stock price has paradoxically risen. This has led financial institutions to express bewilderment regarding its valuation. Morgan analysts have admitted difficulty understanding the firm's financial statements, while others question the perceived strength in future prospects.

Looking at performance metrics, Tesla's revenue from vehicle sales saw its first decline in eight years, with car sales revenue dropping by 10% year-over-year to $18.7 billion. The gross margin for car sales fell to 12.8%, and global sales volume decreased by nearly 20,000 units to a value of $17.89 billion, resulting in a 53% drop in net income attributable to shareholders for the entire fiscal year.

Car sales remain critical for Tesla, contributing 81% of the company's gross profit. In the 2024 fiscal year, the company reported total revenue of $97.69 billion, with $77.07 billion generated from the automotive sector. Of this, $72.48 billion came from vehicle sales, $2.76 billion from regulatory credits, and $1.83 billion from leasing. Meanwhile, energy storage and generation revenues totaled $10.1 billion. However, a pressing issue is the declining profitability of vehicle sales, with the gross margin now lower than industry peers.

At the heart of Tesla's challenge lies its slow model updates, which have eroded its brand premium built on advanced driving technology. Meanwhile, local brands in China have significantly advanced in smart driving technologies, providing more competitive interiors and design, which leaves Tesla at a relative disadvantage in appealing to modern consumers.

Regulatory credits have become a significant source of profit, contributing 39% of overall profitability, which reflects the favorable policy environment for zero-emission vehicles. Tesla has benefited substantially from these programs globally, earning $9.4 billion in the last five years.

Looking ahead, Tesla's valuation is increasingly seen as tied to AI-driven ambitions. It is expected that low-cost new models and the proposed Robotaxi service could be significant growth drivers. However, the competition in the affordable segment poses challenges. Notably, CEO Elon Musk remains enthusiastic about the future, projecting Tesla's valuation could surpass the combined market cap of top industry giants.