Should you invest in Tesla?

Tesla’s share price ended 2024 around 61% higher – a staggering turnaround for a stock that spent the first half of the year in the red. For much of the year, Tesla was not only the worst-performing stock in the Magnificent Seven, but also one of the worst-performing stocks in the S&P 500.

Things started to look up slightly at the end of October, when Tesla unveiled better-than-expected third-quarter results, but it was in November that the share price really took off. The stock rallied in the wake of Donald Trump’s election win as investors took note of the key advisory role that Elon Musk, Tesla’s chief executive, would play to the new president.

Many investors believe that having Musk in Trump’s ear will be good news for Tesla. Musk has been asked to lead Trump’s new department of government efficiency, and one of his mandates is to “dismantle government bureaucracy” and “slash excess regulations”. If Musk helps shape new policies like autonomous driving regulations, Morningstar strategist Seth Goldstein says it could “remove regulatory hurdles for Tesla’s Robotaxi business”.

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That said, recent gains could mean that Tesla’s share price is now unsustainable. By mid-December, the stock had soared to a new record high, surpassing its 2021 peak. This is despite the fact that many of the headwinds that plagued Tesla in the first half of 2024 remain in place today.

Is Tesla’s recent share price rally sustainable?

Russ Mould, investment director at AJ Bell, says the scale of the latest rally is “all a bit odd”. In his view, little has changed in terms of the company’s fundamentals since the first week of November when the share price took off.

Instead, the rally is being driven by “wider optimism about US financial markets and the American economy and hopes that president-elect Trump’s deregulation and tax-cutting plans would have the same galvanising effect as those implemented by Ronald Reagan in the early 1980s”.

Mould warns against sweeping comparisons, though: “the circumstances are deceptively different between now and then – the US federal deficit is way higher, the S&P 500 way more expensive, and expectations much more positive now”.

Furthermore, Tesla still faces challenges such as slowing demand and tougher competition from other e-vehicle manufacturers. Investors received a stark reminder of this on 2 January, when the company reported a drop in its annual delivery numbers for the first time since 2011. Tesla’s share price slumped more than 6% in response to the delivery miss.

Several factors can help explain the drop in delivery numbers. A tougher consumer backdrop could be taking its toll, with households cutting back on expensive items after several years of high inflation and high borrowing costs. There are also reports of a broader slump in e-vehicle demand, not helped by European governments cutting back on e-vehicle subsidies.

At the same time, competition is heating up from lower-priced competitors. BYD is China’s leading e-vehicle manufacturer and Tesla’s greatest competitor – and it is snapping at Tesla’s heels when it comes to sales volumes. BYD delivered 1.76 million battery electric vehicles in 2024, only slightly behind Tesla’s 1.79 million.

Finally, the tariffs Trump has threatened to impose on China could pose another risk on the horizon. “Yes, tariffs on rival Chinese products could help Tesla’s competitive position in the USA,” says Mould, “but Tesla is active in China too and even has manufacturing facilities there”. This puts it at risk of retaliatory action, in his view.

Should you buy or sell Tesla shares?

Sam North, market analyst at eToro, is more optimistic about Tesla’s ability to “drive higher” over the long term and sees the latest drop in deliveries as more of a “momentary blip”. However, he agrees that “slowing demand”, “increased competition from China” and “potential tariff impacts” all pose significant short-term risks.

With this in mind, investors should be wary about buying Tesla stock right now, particularly at the current valuation. Tesla’s shares are currently trading at more than $380 – an 81% premium on Morningstar’s fair value estimate of $210.