Tesla's Valuation and Factor Investing Distortions: Implications for ETF Portfolios

The classification of Tesla, Inc. (TSLA) as a value stock has long been a subject of debate among investors. By traditional metrics, Tesla's valuation appears far removed from the criteria that define value investing. As of early 2026, the company's trailing price-to-earnings (P/E) ratio stands at 301.76, with a forward P/E of 218.24-well above the historical average of 224.16 for the same period. Its price-to-book (P/B) ratio of 18.11 further underscores the disconnect between its market capitalization and tangible assets. These metrics starkly contrast with the benchmarks set by value investing pioneers like Benjamin Graham, who advocated for P/B ratios below 1.20. By these standards, Tesla is not a value stock but a high-growth, high-valuation entity.

Factor ETFs and the Distortion of Traditional Classifications

Tesla's inclusion in factor ETFs has exacerbated distortions in traditional growth and value classifications. In Q3 2025, Tesla was categorized as a high-momentum stock, outperforming the market by 61% and aligning with growth-oriented sectors like artificial intelligence (AI) and technology. However, its inflated valuation metrics-such as a P/E of 322.44-have raised concerns about sustainability. This has led to a paradox: while Tesla's performance aligns with growth and momentum factors, its financial ratios defy conventional growth-stock logic.

The impact on factor ETFs is profound. For instance, the Simplify Volt TSLA Revolution ETF (TESL), which allocates 53.32% to Tesla, and the ARK Autonomous Technology & Robotics ETF (ARKQ), with a 13.68% stake, now reflect a broader narrative around "physical AI". Yet, Tesla's core EV business faces headwinds, including a 9% decline in vehicle deliveries year-over-year in 2025. This divergence has forced ETF providers to recalibrate their methodologies, shifting focus from pure EV exposure to diversified holdings that include Chinese manufacturers like BYD, which surpassed Tesla as the largest EV seller globally.

Methodological Adjustments and Portfolio Implications
ETF providers are increasingly modifying their factor definitions to address Tesla's valuation distortions. For example, the KraneShares Electric Vehicles & Future Mobility ETF (KARS) and the iShares Electric Vehicles and Driving Technology ETF (IDRV) have diversified beyond Tesla to capture regional demand dynamics and supply chain resilience. This shift reflects a recognition that the EV industry is no longer dominated by a single player and that policy changes, such as the end of federal EV tax credits, now play a critical role in ETF performance.

Portfolio managers are also reevaluating Tesla's role in AI-focused strategies. While the company's advancements in Full Self-Driving (FSD) and robotaxi technology have expanded its total addressable market by an estimated $1 trillion by 2030, its valuation remains contentious. Some hedge funds have increased exposure to Tesla, betting on its AI-driven future, while others advocate caution due to risks of overvaluation. This duality highlights the challenges of integrating high-valuation stocks into traditional factor frameworks, where metrics like P/E and P/B are less predictive of long-term success.

The Future of Factor Investing

The broader implications for factor investing are clear. As Tesla's narrative evolves from EV manufacturer to AI and robotics innovator, ETFs must adapt their criteria to capture these shifts. This includes redefining growth factors to account for recurring revenue streams from autonomous driving and robotics, rather than relying solely on vehicle sales. Additionally, the rise of ESG criteria, which often favor growth narratives over value-based investing, further complicates factor definitions.

For investors, the lesson is twofold: first, diversification is critical to mitigate overreliance on single stocks like Tesla; second, factor ETFs must balance innovation with valuation discipline. As AI infrastructure spending accelerates-projected to reach $527 billion in 2026-investors should prioritize ETFs that offer broad exposure to AI innovation while maintaining rigorous screening for sustainable growth.

Conclusion

Tesla's valuation and strategic pivot into AI have reshaped the landscape of factor investing. While its financial metrics disqualify it as a value stock, its influence on growth and momentum factors remains undeniable. ETF providers are responding by diversifying holdings and redefining criteria, but the challenge of aligning traditional factors with high-valuation, high-growth companies persists. For portfolio managers, the key lies in balancing innovation with prudence-a task that will define the future of factor investing in an era dominated by technological disruption.