A year ago, the outlook for Tesla (NASDAQ: TSLA) looked mixed. 2025 has been a wild ride for Tesla stock. It has moved up around a fifth since the turn of the year, but very unevenly. Between April and Christmas Eve, for example, it went up by 113%.
That means Tesla now has a market capitalization of some $1.5trn. But the mixed outlook I mentioned above has caused multiple problems for the business, not least some disappointing car sales volumes this year.
The rise in Tesla’s stock price also means that it now sells for 325 times earnings.
An uneven business performance and sky-high valuation do not necessarily sit comfortably together.
Could Tesla come crashing down to earth next year? Or might it still have lots of open road ahead of it?
A mixed performance, but lots of bright spots
The dizzying price tag of the company immediately raises my hackles as a would-be investor, making it easy for me to think of multiple concerns I have about the direction of the business.
But successful investing involves trying not to get too emotional about a company.
There are quite a few challenges for Tesla, as I will discuss below. But in many ways 2025 has been a good year for the company.
The latest quarter saw its best ever car sales volumes.
There is more to Tesla than just electric vehicles, though. It also has a sizeable, growing power storage and distribution business. That division reported a record level of deployment across residential, industrial, and utility sectors during the most recent quarter.
Those strong sales results contributed to a record level of both revenue and free cash flow generation for the company in the most recent quarter.
I think Tesla has also seen its operating environment become more attractive in some ways. Demand for electric vehicles and power storage solutions remains robust.
AI and robotics have gained traction with business leaders and some consumers too this year, potentially vindicating Tesla’s long-term ambitions in those areas.
Storm clouds on multiple fronts
Still, while there have been some significant bright spots in the car maker’s performance this year, multiple ongoing risks have reared their head, in terms of business impact already.
One is weakening car sales. 2024 had already seen sales volumes decline slightly. The first half of this year saw sales move down significantly. Tesla’s brand has been affected by its boss’s political profile. Meanwhile, the electric car vehicle market has become more competitive.
That bad first-half performance stood in contrast to last quarter. But it remains to be seen what Tesla’s long-term vehicle sales trend is. Last quarter was likely impacted by consumers rushing to buy cars before some US tax incentives ended, another long-term risk I see for the firm.
Such market pressures help explain why even in a quarter marked by record sales volumes, net income attributable to common shareholders fell 37% year on year.
Meanwhile, AI and robotics remain unproven ideas more than viable businesses operating at scale for Tesla.
The Tesla stock valuation has long confounded many critics. That could continue in 2026, especially if sales remain buoyant.
But to me the mismatch between business performance and valuation is enormous. I think the stock price could justifiably crash. I have no plans to invest.
This story originally appeared on Motley Fool
