When it comes to Tesla(NASDAQ: TSLA), Ark Invest and Cathie Wood are committed to their analysis, even though it falls far from the conventional wisdom. Wood offered updated guidance in March about Tesla stock that suggests it will hit a price of $2,600 within five years. That price is more than 10x its current price of around $240 and, without factoring in share dilution, this would bring the stock's market cap close to $10 trillion.
Heck, sometimes contrarian bets do pay off. But while I respect the guts it takes to make a contrarian bet, in this scenario I think Cathie Wood is going to look wildly wrong with her Tesla price target. The electric vehicle maker and tech company is seeing slowing sales, declining deliveries, and is failing to bring viable new products to market.
Instead of a $2,600 share price, I predict that Tesla is much more likely to fall to $26. Here's why.
Falling deliveries, inventory buildup
In the past couple of years, CEO Elon Musk's focus has been divided among a wide range of companies, products, and services (and several political endeavors). But Tesla itself is still driven by manufacturing and selling electric vehicles (EVs) -- specifically, its Model 3 and Y product lines. If the company sells more of these vehicles, it will grow. This is not difficult to understand.
The first quarter of 2025 looked ugly for Tesla's EV division. Deliveries collapsed to 337,000 in the first quarter, down 13% year over year and its lowest delivery figure since Q2 of 2022. Demand for its EV products seems to be waning as competition grows around the world and as boycotts of Musk products take hold. This is coupled with the company sharply dropping its average selling prices for new vehicle sales, a double whammy that will impact revenue.
At the same time, Tesla is building up inventory that it cannot sell, producing 26,000 more vehicles than it sold to customers in the first quarter. Growing inventory for an automotive manufacturer is dangerous. For one, it will negatively hit Tesla's free cash flow and rapidly deplete its cash balance (if this trend continues). Second, cars depreciate quickly, meaning that if Tesla cannot sell these vehicles they will only decrease in value in the quarters to come.
Not a great place to be for a company that is still considered a part of the "Magnificent Seven" and once sported a market cap topping $1.5 trillion (it has slipped to $770 billion).
Where are the new products?
Tesla bulls like Cathie Wood may wax poetic on all the things Tesla is working on outside of cars. My response to that would be: What actual products has it shipped? The energy generation and battery pack business has turned into a decent segment, but it is still not material to the operations and barely generates a profit.
The new products like the Optimus Robot, self-driving taxis, artificial intelligence, and Semi EV truck have not made it to mass production yet. The Cybertruck has, but if we look at the percentage of sales from Tesla's EV business that do not come from the Model 3 and Y, this product has been a total flop littered with recalls and unhappy customers.
The company, Elon Musk, and this management team keep promising new and innovative products that will drive growth for Tesla outside of EVs. However, they have been saying this for years now, and none of these products have come to market. There is no reason to expect this to change in 2025. Hope is not a strategy when reality tells a different story.
Given the uncertain economy and the anti-Musk sentiment at the moment, is likely that Tesla will fall much further from here. Revenue has stagnated for the last two years at around $100 billion. Ugly Q1 deliveries will finally break through to a major sales contraction. Profits keep falling, with net income of $7 billion in 2024. Again, this will likely fall in 2025.
Net income of $7 billion versus a market cap of $770 billion is a price-to-earnings ratio (P/E) of 117. Remember, earnings are likely to fall in 2025, making the P/E ratio that much uglier. A low-growth company in a cyclical industry with high capital intensity -- which defines Tesla -- deserves a P/E ratio of 10, not 100-plus. A P/E of 10 would bring Tesla's stock down to a much more reasonable price of $26. This is where its automotive peers trade.
I think this is much more likely if you look at the underlying financials than a price target of $2,600. Those are just dreams not anchored in reality and will only disappoint investors such as Cathie Wood who owns Tesla stock.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
