Tesla’s wild ride: Musk, AI and the trillion-dollar bet

While Tesla’s fortunes in the fast-moving world of electric vehicles are tied to the public persona of Elon Musk, they also depend on maintaining advantage against Chinese rivals.

Tesla’s story for the past few years reads like a rollercoaster, driven as much by Elon Musk’s strategic gambits and public persona as by underlying business fundamentals. That would usually be a sign to run for the hills, but Elon Musk is a once-in-a-generation business leader. Investors, in the main, have been willing to look past the character flaws, betting instead that his genius will take Tesla to the next level.

The investment case has always been polarising. A car maker with energy, robotics and AI all wound up into one package. Depending on how much value you assign to the AI story, it is easy to get a wildly different result for how much this business should be worth.

Tesla’s core auto business is a best-in-breed operation, and no one outside China can compete with the unit economics on show. Making an electric vehicle (EV) at scale is hard; turning a profit is even harder; generating positive cash flow is near impossible — yet Tesla achieves all three.

Still, the story in recent years has been one of a declining auto business. Competition is intense, price wars have broken out across all major geographies and the rise of Chinese EVs  — often subsidised by the government in Beijing — means Tesla’s margins have been eroded.

The recently refreshed Model Y should help prop up sales in the near term, but updated models are rarely longer-term volume drivers. If Tesla can launch a more affordable vehicle in the coming quarter, there is a significant gap, especially in China, that can offer meaningful growth. Tesla only offers two vehicles in China, at relatively high price points; competitors like BYD have a full suite of options across the value scale.

But the benefit to the profit line of selling a few more cars is no longer as meaningful as it once was. Even in good times, a car maker can only go so far — to sustain life in the trillion-dollar market cap club, there needs to be more.

First movers

That’s where the AI and autonomy story comes in. Driverless cars probably sounded like a pipe dream not long ago, but the future has arrived. Waymo has taken the first-mover advantage in the US, but Tesla is not far behind, having just launched its first fleet of fully autonomous Model Ys in Texas.

Tesla has several key advantages over rivals here. The first is scale; the auto business has put millions of Teslas on the road already, each capable of being a driverless vehicle with a software update. The second is cost; Tesla has a huge advantage over someone like Waymo, who need to source the vehicles and then kit them out with expensive hardware.

When it comes to ordering a taxi, price is everything, and Tesla’s operating model should allow for significantly lower prices. The question is whether Tesla’s vision-only approach can deliver a safe enough product; time will tell, but betting against Elon Musk to solve a software problem feels like a losing play.

More recently, Mr Musk’s political involvement has taken centre stage. What started as an endorsement for president Donald Trump ended up with practically a full-time job working for the US government as part of the so-called Department for Government Efficiency (Doge).

Having the White House on side, after four years under a less-than-friendly Biden administration, was seen as a decent trade-off for Mr Musk’s time. Tesla shares reached a record high in the post-election result market rally, but the writing was on the wall in hindsight. This was a bromance between two giant egos and that tends to be a recipe for disaster.

“Betting against Elon Musk to solve a software problem feels like a losing play”

Solar incentives

President Trump’s ‘Big Beautiful Bill’ provided the tinder to light the fire. It not only increases the US deficit, an issue close to Mr Musk’s heart, but includes a range of cuts to EV and solar incentives that will meaningfully impact Tesla. When the fallout came, it was hard and fast, and Tesla shares were caught in the crossfire as markets prepared for potential retaliation from the president. Cooler heads have since prevailed, and while it is unlikely the bromance will ever be rekindled, both parties look to have settled on the notion that peace is in both of their interests.

Wrapping this up with a nice bow, the Tesla investment case is not for the faint of heart. This is a new chapter for a business that has beaten the odds time and time again. The opportunity ahead in autonomous driving and, further down the line, robotics, is enormous. For those who can stomach the drama that comes with Elon Musk, there are few companies out there with a better chance of monetising AI in the real world.

The author holds shares in Tesla

Matt Britzman, senior equity analyst, Hargreaves Lansdown