Tesla's AI Hype Is Doing the Heavy Lifting for the Stock, but It Won't Be Enough for Long

Key Points

• Tesla stock is down in 2025, but shares remain overvalued compared to other automotive stocks.

• While Tesla’s EV business faces significant headwinds, investor focus remains largely on the company’s long-term artificial intelligence (AI) growth potential.

• If the AI bubble bursts, or Tesla fails to make enough AI-related progress, shares could be in for a major pullback.

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Tesla (NASDAQ: TSLA) stock may be cheaper than it was at the start of the year, but it is hardly a bargain. In fact, compared to other automotive stocks, Tesla remains highly overvalued. This could be troublesome for investors in this stock down the road.

Hype surrounding Tesla's potential artificial intelligence (AI) catalysts, including robotaxis, the Optimus project, and other possible AI-related endeavors, are helping the stock stay roughly between $300 and $350 per share. However, if the AI bubble bursts or if AI fails to strengthen an earnings recovery in 2026, a severe pullback could happen.

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Why Tesla stock has lagged the market

Despite high uncertainty regarding inflation, interest rates, and tariffs, the stock market, as measured by the S&P 500 (SNPINDEX: ^GSPC), remains in the green, up nearly 10% year to date.

Tesla, on the other hand, has severely lagged the market, falling 13% year to date through Aug. 27. This is not surprising. Tesla CEO Elon Musk's rocky, short-lived alliance with President Donald Trump has reportedly led to a decline in brand loyalty. Although Musk and Trump parted ways, and on bad terms at that, political backlash persists.

This, plus factors like economic uncertainty and high competition in markets like China and Europe, has contributed to double-digit declines in Tesla's revenue and earnings.

YOY = year over year.

In Q2 2025, total revenue was down by 12% compared to the prior year's quarter. This has furthered another long-standing issue with Tesla: falling margins. Rising competition and weak demand have resulted in Tesla continuously lowering vehicle prices.

Instead of spurring a sales rebound, this has put an additional squeeze on profitability, with Q2 2025 adjusted earnings coming in at $1.4 billion, or $0.40 per share, down 23% compared to Q2 2024.

Shares are holding steady, thanks to Tesla's AI potential

Tesla may be facing headwinds with its EV business right now, but I believe Tesla's valuation barely reflects these challenges. Despite weak fundamentals, Tesla stock remains extremely overvalued compared to traditional automotive stocks.

Recently, Tesla has been trading for between 170 and 190 times forward earnings estimates. Compare that to other global automakers Ford Motor Company and Toyota, which trade for roughly 10 and 13 times forward earnings, respectively. Again, though, it's not a mystery why Tesla's valuation premium has held steady.

Tesla's high growth and first-mover advantage in EVs previously justified this valuation premium, but today, it's the company's long-term AI potential that's doing this heavy lifting. The market remains extremely bullish about Tesla's potential AI catalysts.

Recent events, such as the soft launch of its robotaxi in Austin, Texas, have strengthened this view. There is also speculation that Musk will eventually merge his privately held AI start-up xAI into Tesla. Musk has thus far denied that that is his long-term plan, but he hasn't ruled out the possibility of putting this issue up for a shareholder vote.

What shifting sentiment could mean for Tesla's stock price

There may be some substance to all the AI hype surrounding Tesla, but this hype could be on shaky ground. Per a recent study from MIT, the massive investment into generative AI has yet to translate into positive returns for businesses.

If this is the prelude to businesses walking back their AI plans, it could bring an end to this bubble. Even if the AI bubble doesn't burst, there are other ways the hype for Tesla stock could deflate -- for instance, lack of progress with the robotaxi, the Optimus robot, or Tesla's other AI ventures.

In any of these scenarios, Tesla's stock price could get decimated. Yes, analysts do expect the company to experience an EV rebound in 2026. By then, macro uncertainty and possibly the political backlash will have eased.

Still, it's possible that investors are expecting Tesla to handily beat forecasts. If this fails to happen, sentiment for Tesla stock could make a severely bearish shift. How far could shares fall?

The last time sentiment shifted sharply in the wrong direction, shares traded for between 50 and 75 times earnings. With this in mind, it's possible that, even if the company's 2026 earnings per share come in at $2.40, in line with analyst estimates, the stock by then could be trading for between $120 and $180 per share, or roughly 49% to 66% below present price levels.

Considering other factors that add uncertainty to a 2026 earnings recovery, including the sunsetting of the EV tax credit in the U.S. on Sept. 30, the risk/reward proposition with Tesla stock appears even less favorable.

Until Tesla's AI projects start boosting profitability, or if an improving macro backdrop starts to signal a much stronger recovery ahead for Tesla's core business, I'm sitting this one out.

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Thomas Niel has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.