Where Will Tesla Be in 5 Years?

Key Points

• Tesla's operating income is falling and free cash flow tumbled in Q2.

• Management is betting big on autonomous vehicles and robotaxis, which have a combined market potential of over $6 trillion.

• It's going to be difficult for Tesla to invest in its future over the coming years.

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Anyone following Tesla's (NASDAQ: TSLA) story knows that the company is not doing well right now. Deliveries are falling, competition is rising, and its operating income in tumbling fast.

Many of the Tesla's poor results are self-inflicted. Tesla CEO Elon Musk ran the Department of Government Efficiency for several months and the result was that some current and potential Tesla customers have been alienated from the brand.

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Musk has said he's now recommitted to Tesla, but substantial damage has already been done that could inhibit the company's future growth. So, where could the EV company be in five years?

Image source: Tesla.

Tesla's recent quarter was a red flag

Tesla's latest quarter underscored the company's challenges, from falling deliveries to weakening financial results.

In Q2, its vehicle production was flat year over year at about 410,00, while deliveries plunged by 13% to 384,122. But even more worrisome for investors, operating income tumbled 42% to $923 million while free cash flow plunged 89% to just $146 million. Tesla attributed the profit decline, in part, to fewer regulatory credit sales, higher operating expenses, and weaker deliveries.

Tesla's sales of auto regulatory credits fell to $439 million from $890 million in the year-ago quarter and net income dropped 16% to $1.1 billion. Its operating margin also fell to 4.1%, down from 6.3% in Q2 2024.

For shareholders, these results signal a double threat: shrinking profitability and far less cash available to reinvest in growth initiatives like new vehicles, autonomous driving, and robotaxis. Put simply, Tesla is generating less income from its core business at the very moment it faces stronger competition from global EV companies and needs to spend aggressively to expand into new growth areas. That's a troubling combination for long-term investors.

Shrinking profit makes new investments difficult

Tesla has bold ambitions for its future, with the company focused on expanding further into the self-driving vehicle and humanoid robot markets.

Tesla has said it will produce about 5,000 of its Optimus robots this year and has set goals of manufacturing 50,000 next year and 1 million annually by 2030. Some reports indicate Tesla is behind schedule to hit its goal for this year, but even if it misses that target, the long-term opportunity could still be intact. The market for humanoid robots could be worth an estimated $5 trillion by 2050. A ceiling that high gives Tesla plenty of room for growth over the next few years.

Tesla is also betting that autonomous vehicles (AVs) will play a significant role in the future of transportation, which is why it recently launched its robotaxi service with debuts in Austin and San Francisco. For now, its self-driving vehicles are still operating with either remote autopilot monitors or a human behind the wheel. Reportedly, the company is hiring driving operators in nearly 10 more cities.Tesla is hoping snag a portion of the substantial autonomous vehicle market in the coming years, which will be worth $1.4 trillion by 2040.

Yet, with the company's falling operating income and free cash flow evaporating, Tesla may not have the cash it needs to expand into these new markets. One of the company's top priorities right now will be to improve profitablity, which will be very difficult if its trying to expand robotics and AVs.

So, where will Tesla be in five years?

To say that Tesla's future is cloudy right now is an understatement. While Tesla is placing some big bets on humanoid robot and autonomous vehicles, it's very uncertain whether it will be able to boost its EV business enough to fund those endeavors.

Both robotics and AVs will likely take billions of dollars of investments over many years before they could potentially grow into profitable businesses for Tesla -- if ever. What's more, Tesla's stock is very expensive right now, with a price-to-earnings ratio of 202. Even by the standards of high-growth tech companies, that's an unusually high multiple. And with Tesla's earnings now in decline, the stock's premium valuation is becoming increasingly difficult to justify.

With its stock trading at a lofty premium, operating income falling, and Tesla's big bets far from a sure thing, investors would be better off not buying Tesla right now.

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Chris Neiger 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.