Titled "Tesla's AI Potential: A Lucrative Option, Yet Two Cautions Before 2025," here's a revised and restructured version of the original article:
In the tumultuous year of 2024, Tesla's (TSLA -4.06%) stock saw more than its fair share of red ink, yet boasted a surprising year-to-date return of 56%. This remarkable feat was largely due to the reelection of former President Trump, whose administration was expected to regulate advancements in autonomous driving with a more lenient hand.
Investors were bullish on Tesla, driven by speculations of light touch regulation and financial opportunities in the autonomous driving sector. The Ark Investment Management founder, Cathie Wood, referred to Tesla as the world's largest artificial intelligence (AI) play, attributing this to the company's Full Self-Driving (FSD) software and revolutionary Cybercab robotaxi. Other analysts shared Wood's sentiment, raising their price targets for Tesla stock significantly.
Autonomous driving has the potential to revolutionize Tesla's revenues, particularly with the introduction of the Cybercab. This vehicle, devoid of pedals and even a steering wheel, is powered by Tesla's FSD software. The ambitious Elon Musk envisions a 24/7 ride-hailing network, generating revenue for Tesla by transporting passengers. Consumers are even encouraged to operate their own Cybercab fleets.
The financial benefits of FSD extend way beyond the Cybercab. Owners of Tesla's electric vehicles can subscribe to the software, and Musk floated the idea of licensing the technology to other automakers. According to Ark Invest, this potential could inflate Tesla's valuation from its current $1.2 trillion to a staggering $8 trillion by 2029.
However, Tesla's self-driving technology still faces regulatory challenges. Despite no regulatory approval in any U.S. state, the path may be smoother under the Trump administration. With the Cybercab scheduled for production in 2026, investors may find it premature to invest heavily in Tesla stock due to these hurdles and two significant concerns.
Firstly, Tesla's electric vehicle sales have started to falter. Though sales increased by an impressive 38% over 2022, growth rates dropped below Musk's predicted 50%. More worryingly, deliveries decreased by 2.3% through the first three quarters of 2024. This decline in demand, coupled with fierce competition from low-cost Chinese manufacturers, could potentially harm Tesla's sales even further.
Secondly, Tesla's valuation is sky-high, currently trading at a P/E ratio of 106.6 – triple the ratio of the Nasdaq-100 index. The company slashed car prices by 25% in 2023, pressuring profits. The projected growth from FSD and the Cybercab is exciting, but expectations may be unrealistic given the time it will take to see real financial benefits.
Enrichment Data Insights:
- Tesla's Full Self-Driving (FSD) technology faces significant regulatory hurdles in the U.S., particularly in California and Texas.
- California has stringent requirements for autonomous vehicle testing and deployment, while Texas has more permissive regulations.
- The Trump administration is expected to have a deregulatory approach, which could simplify and expedite regulatory approvals, potentially making it easier for Tesla to deploy the Cybercab.
- However, the elimination of safety-focused regulations could compromise public trust and hinder adoption of autonomous vehicles if safety incidents occur without adequate oversight.
Investors are keen on Tesla's potential earnings in the autonomous driving sector, seeing opportunities in the lenient regulatory environment proposed by former President Trump. With the reelection of Trump, there's hope for a smoother path towards approvals for Tesla's Self-Driving technology and Cybercab vehicle.
Despite the attractive prospects of Tesla's Full Self-Driving (FSD) software and the Cybercab, investors should be cautious due to the company's high valuation and the challenges in meeting sales targets, especially with increasing competition and faltering electric vehicle sales.
