Bad News for Tesla Shareholders: Should You Sell the Stock?

Tesla (NASDAQ: TSLA) is one of the leading electric vehicle (EV) makers in the world and a pioneer in the industry, but the stock's long-term thesis has shifted to other ventures, including its attempt to scale its robotaxi service. The company's Full Self-Driving (FSD) software is central to this long-term goal. But what happens if Tesla faces pushback in its efforts to secure regulatory approval for its FSD software? According to some reports, the company may be running into this problem. Here's what investors need to know.

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European lawmakers are pushing back

Tesla is seeking regulatory approval for its FSD system in Europe. This is an important step for the company to launch its robotaxi service, but it goes even deeper than that. Offering FSD subscriptions to European drivers could expand the company's high-margin software revenue. It would also grant it access to far more real-world data to train and improve its FSD software, which is currently at level 2, meaning that while it can drive itself under certain circumstances, drivers must remain attentive at all times.

So, the stakes are high for Tesla, which is why it isn't great news that some regulators in the European Union (EU) are hesitant to give the company's FSD the green light. They are worried about certain aspects of Tesla's FSD, which apparently has the proverbial lead foot and a less-than-effective method for preventing drivers from using their smartphones while behind the wheel, among other concerns. Representatives from EU member states could vote on Tesla's FSD later this year. If enough of them share concerns over Tesla's technology, the company could fail to secure approval and allow its competitors to gain some ground.

What does this mean for investors?

While regulators in the Netherlands granted Tesla's FSD the green light last month, the broader EU consensus remains the primary hurdle for the EV maker. Even if the EU declines to give its FSD the thumbs up, the company will likely regroup, make appropriate changes to its functionality, and try again. That may or may not take a long time, depending on the reasons behind the EU's skepticism. However, this episode once again highlights that regulatory risk is one of the most significant threats to Tesla's long-term thesis.

Over the past couple of years, the company has dealt with tariffs, changes to EV tax credits in the U.S. -- which harmed its sales -- and complaints about its FSD in the country that got regulators' attention. Tesla could be massively successful over the long run if it can scale its robotaxi business and dominate that niche. It's also important to factor the company's work with humanoid robots into the equation. The market is clearly doing that, which is why Tesla trades at an eye-popping 208.3x forward earnings.

The company might justify this lofty (to say the least) valuation if it can execute its long-term plans successfully while keeping potential threats, including regulatory ones, at bay. But if it is unable to do so, Tesla's shares could lag broader equities over the next five to 10 years. In other words, Tesla is a fairly risky stock. Investors have to remember that before thinking about pulling the trigger.

Prosper Junior Bakiny 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.