Tesla Stock: More Upside Despite Lofty 195x Valuation?

Tesla stock (NASDAQ:TSLA) has faced a turbulent 2025, with political spats, softening sales, and intensifying competition. It may not be all doom and gloom for Tesla, however, as a string of fresh catalysts may be reviving the stock’s long-term bull case. From AI opportunities to cost advantages in a shifting tariff landscape, Tesla is regaining investor attention, and shares have risen close to 6% over the last five trading sessions. Yes, valuations remain steep at about 195x forward earnings, but the narrative may be turning in Tesla’s favor. Here’s a quick look at the positives driving optimism in the stock.

Image by ElasticComputeFarm from Pixabay

Thawing Sentiment With Trump 

Elon Musk’s dramatic and very public fallout with President Donald Trump, following a brief political partnership during the 2024 campaign and early months of the Trump Presidency, cast a shadow over Tesla’s regulatory prospects. However, sentiment appears to be shifting. In recent weeks, Trump has publicly softened his tone, saying, “I want Elon’s business to thrive,” and has generally gone easier on his friend-turned-foe. Although policy risks remain, a warmer relationship could remove a key overhang.

Separately, Elon Musk is also firmly back in the driver’s seat at Tesla after his brief stint in Washington, again fully focused on Tesla’s mission – scaling EV production, launching robotaxis, and imagining up AI-powered robotics. Tesla recently issued a letter to shareholders outlining Musk’s new compensation package of 96 million restricted shares, potentially worth close to $30 billion, tied to ambitious performance milestones. This is a signal that Musk is directly incentivized to deliver big shareholder returns. Now, investing in a single stock carries high risk. The Trefis High Quality Portfolio is designed to reduce stock-specific risk while giving upside exposure.

Tesla Stock As Proxy for Physical AI

AI compute has been the hottest trend in the tech space over the last three years, propelling valuations to unprecedented heights. Nvidia is now worth nearly $4.5 trillion and Broadcom close to $1.5 trillion, all on the back of AI compute infrastructure demand. Just as AI computing became the foundational layer for the digital AI boom, “physical AI” could be the next big opportunity. We think the markets could be starting to view Tesla as a proxy of sorts for physical AI. The company uniquely combines cutting-edge software, advanced hardware, and large-scale manufacturing expertise – three ingredients critical for leading this emerging sector.

Tesla’s years of leadership in autonomous driving have given it a massive AI software advantage, its robotics know-how is embedded in highly automated factories, and its vertical integration ensures control from chip design to final assembly. Besides self-driving cars, Optimus, Tesla’s humanoid robot, aimed at performing repetitive, dangerous, or mundane tasks in factories, warehouses, and homes could be a big business for Tesla. Tesla’s goal is to mass-produce millions of units annually by 2030 at a sub-$20,000 price point, opening up a new market with vast potential. Unlike many small robotics startups, Tesla has the capital, engineering talent, and manufacturing scale to move from prototype to mass deployment. See the math on How Tesla stock soars to $1500

Tariffs And Subsidy Cuts, A Net Positive

Although Tesla’s deliveries fell 13.5% to 384,122 vehicles in Q2, investors appear to be looking past the decline. Recent regulatory changes under the Trump Administration, widely seen as negative for the auto industry, could, in fact, benefit Tesla. A 25% tariff on all imported passenger vehicles and light trucks took effect in April 2025, followed by tariffs on certain imported auto parts in May. Tesla may emerge as a net beneficiary, as it builds all U.S. vehicles in California and Texas, avoiding these tariffs, while competitors like GM and Ford produce some EVs in Mexico and could face higher costs.

As these tariffs work through the supply chain, Tesla’s price competitiveness could improve, helping it defend and grow U.S. market share. Additionally, while the federal electric vehicle mandate has been scrapped, Tesla’s advantage as one of the lowest-cost EV producers remains intact and this could give it an edge over other players who leaned more aggressively to compensate for an elevated cost base. The company’s disciplined management of fixed costs, including R&D and SG&A, has helped it stay profitable even in challenging market conditions.  Also see: Will Slowing Cloud Business drag Amazon stock to $100? 

Robotaxi Developments

One of the most promising opportunities for Tesla could be its robotaxi business. To be sure, Tesla will be playing catch-up with Google’s Waymo, which has offered autonomous rides in several cities for almost five years now. Still, Tesla has a couple of advantages. The company controls the whole stack: it builds the EVs, develops the software, and operates the charging network. It also has a large base of vehicles already on the road that can be brought into its robotaxi fleet. In comparison, Waymo vehicles are much more expensive with the modifications to make a car self-driving reportedly totaling as much as $100,000.

That’s a real edge for Tesla. Tesla has now obtained a ride-share license in Texas, clearing the way for its autonomous robotaxi service to operate under the state’s new self-driving regulations alongside established players like Uber and Lyft.  The ride-hailing market is already huge. Uber handled over 230 million rides per week in Q4 2024 alone. At roughly $30 per ride, that’s a $375 billion annual revenue pool, and that’s just human-driven rides. Autonomous could be even bigger – think as much as $750 billion per year. This presents a big revenue opportunity for Tesla.

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