Tesla is currently navigating two contrasting narratives: "AI-driven future growth" and "a slowdown in the automotive business." The former fuels the stock price, while the latter dampens profitability.
On October 17, according to Hard AI, Barclays analyst Dan Levy noted in a recent report that Tesla is caught between "two stories": on one hand, Elon Musk’s renewed involvement (new compensation plan, $1 billion stock buyback) accelerates the AI/autonomous driving narrative; on the other hand, weak fundamentals indicate that third-quarter delivery volumes may have peaked for some time.
The analyst cautioned that the robust performance in the third quarter was likely driven by "pulled-forward demand" before the expiration of the electric vehicle tax credit, which is expected to become the sales peak for quite a while. Given that Tesla’s stock price has risen 32% since early September (while the S&P 500 gained only 4%), positive news might already be fully priced in.
The report explicitly states: “We believe that fundamentals have taken a backseat for Tesla investors, with the narratives around autonomous driving and AI taking center stage... However, the belief that fundamentals are unimportant is only temporary — until one day, fundamentals will again matter. The core automotive business is crucial for financing future autonomous driving and AI growth, including the capital-intensive scaling process of Robotaxi.”
Barclays maintains a "Neutral" rating on Tesla, raising the target price from $275 to $350, which still implies nearly a 20% downside from the current stock price of $435.
Musk’s "return to Tesla" fuels sentiment, dominating the AI narrative. Barclays believes that Tesla's upward momentum is driven by the "story" rather than numbers. Recently, Musk introduced a new 2025 compensation plan and personally bought $1 billion worth of Tesla stock, which the market interpreted as him refocusing on the company.
At the same time, the narratives around Robotaxi (autonomous taxis) and the humanoid robot "Optimus" are heating up again, becoming key words pursued by investors. Despite limited disclosures from the company regarding these two AI-related businesses, the market continues to drive up valuations based on future potential.
The analysts stated that Tesla is attracting capital with "Mars-shot milestones" — grand visions that are far from profitability.
Sales Peaking, Profits Under Pressure: Reality Pulls Down the "Myth" In the midst of capital market exuberance, Tesla's operational reality is cooling off.
Barclays expects the company’s third-quarter earnings per share (EPS) to be about $0.60, exceeding the market’s expectation of $0.52, but this has already been priced into the stock. The key risk is that beginning in the fourth quarter, both sales and profits may decline simultaneously.
Sales may have peaked: Third-quarter deliveries totaled 497,000 units, a seasonal high. With the expiration of the $7,500 electric vehicle tax credit in the U.S., fourth-quarter sales are expected to drop to 425,000 units, bringing total annual deliveries to approximately 1.64 million units, an 8% year-over-year decline, marking a second consecutive year of decline.
New models lack excitement: The newly launched "lower-priced" Model 3/Y are not entirely new models but simplified versions of existing ones (with reduced features and battery capacity). Analysts point out that these vehicles may primarily "cannibalize" sales of existing high-end models, resulting in limited new demand.
"We are disappointed with the new car launches; we expected to see more product diversity... Investor feedback on the releases has been generally negative, with many awaiting more clarity on profitability during the earnings call."
Profitability continues to decline: Barclays forecasts Tesla’s EPS for 2025 and 2026 to be $1.61 and $1.48, respectively, both lower than market expectations ($1.75 and $2.46). The gross margin is projected to be under pressure continuously, declining from 29% in 2022 to around 16% by 2025.
Logic Behind the Target Price Increase Currently, Tesla has a market capitalization of $1.45 trillion, with an enterprise value to EBITDA ratio of as high as 125.8 times (2025 projections), significantly higher than traditional automakers. This valuation is entirely based on optimistic expectations regarding autonomous driving and AI prospects, rather than current fundamentals.
Despite weak fundamentals, Barclays still raises Tesla’s target price by 27% to $350, reflecting primarily a valuation adjustment for the AI/autonomous driving opportunity (the base case price-to-earnings ratio increased from 41 times to 65 times), rather than recognizing any improvement in fundamentals, and the current stock price of $435 still suggests about a 20% downside potential.
Moreover, Barclays holds a neutral to slightly negative outlook ahead of the third-quarter earnings release. The rationale is that the stock price surge has fully reflected performance expectations, while the earnings report may remind the market of the weak fundamentals post-third quarter. However, the institution also stresses that any stock price pullback could be short-lived, as the shareholder meeting on November 6 may reignite market enthusiasm for the growth narrative.