"Big Short" Investor Michael Burry Thinks Tesla Stock Is Overvalued. Is He Right?

Shares of Tesla (NASDAQ: TSLA) are back in the spotlight after "Big Short" investor Michael Burry used his new Cassandra Unchained newsletter to call the stock "ridiculously overvalued." Burry, who got his "Big Short" investor nickname from shorting the U.S. housing market during the supbrime mortgage crisis and the subsequent movie he was depicted in, argues that the electric-car maker's lofty market value and Tesla CEO Elon Musk's $1 trillion pay package expose shareholders to ongoing dilution in a company that does not repurchase its stock.

Meanwhile, the electric-vehicle maker and energy-storage company is growing more slowly than it used to. And its profit margins are eroding as it relies on price cuts and shifts shareholders' focus away from its core business to newer initiatives, such as an autonomous ride-sharing network and humanoid robots. Revenue in 2024 barely grew compared with 2023, and more recent quarterly results show only modest top-line gains while operating income is falling.

All this to say: Burry has a point.

Tesla's unreleased Cybercab is purpose-built for autonomous driving. Image source: Tesla.

Near-term challenges

Tesla's reported results show a business that is still expanding, but on less attractive terms than in prior years.

For the full year of 2024, for instance, revenue rose about 1% to roughly $97.7 billion, a stark slowdown from about 19% growth in 2023. Things have been improving recently, but growth remains significantly below 2023 levels. In Q3, Tesla generated record revenue of about $28.1 billion, up 12% year over year, helped by 497,099 vehicle deliveries, which increased 7%.

Tesla's biggest problem lately is its bottom line. Profitability has been moving in the wrong direction. For instance, Tesla's operating margin fell to about 7.2% in 2024, from 9.2% in 2023. And profitability isn't faring well this year either. Operating income in Tesla's most recent quarter dropped 40% to $1.6 billion as its operating margin continued to compress.

This margin pressure comes as Tesla is investing heavily in its future. Management has said it expects capital expenditures in 2025 to be around $9 billion as it builds out Cybercab manufacturing, semi production, and AI (artificial intelligence) infrastructure to support autonomous driving and robotics. Those projects could support new profit pools over time, yet they also keep near-term free cash flow and margins under pressure.

The stock's valuation is questionable

Against that backdrop, the stock's valuation looks demanding to say the least. With shares trading at around $430 as of this writing, the company has a market capitalization of more than $1.4 trillion, a level that implies a price-to-earnings ratio of 294. A valuation like this means the market has already priced in a return to rapid growth, a recovery of Tesla's profit margins, and a successful rollout of an autonomous ride-sharing network.

The stock's premium valuation shows up in sales-based metrics as well. Tesla trades at roughly 16 times sales. Established automakers such as Toyota Motor and General Motors trade at price-to-sales ratios below 1. The gap is enormous.

Bulls argue that direct comparisons to traditional automakers miss Tesla's AI and software potential. During the company's third-quarter earnings call, CEO Elon Musk said, "Optimus at scale is the infinite money glitch," suggesting humanoid robots could eventually eclipse the vehicle business. In addition, the company emphasized in its third-quarter update that, over time, it expects its "hardware-related profits to be accompanied by an acceleration of AI, software, and fleet-based profits."

Burry's critique pushes in the other direction. His recent note highlights what he sees as excessive reliance on ambitious narratives about autonomy and robotics, even as underlying auto margins weaken and equity-based compensation continues to dilute shareholders. If profits remain under pressure and major new profit streams take longer than hoped to materialize, today's valuation leaves very little room for disappointment.

For investors, the key issue is not whether Tesla can grow from here; recent results and the company's product pipeline show that it can. The issue is the stock's valuation and the speculative nature of the company's more aspirational growth ambitions, which are difficult to forecast.

Of course, there is real risk in betting against a company with Tesla's brand, technology, and optionality in AI, energy storage, and robotics, especially if the company executes more quickly than expected on robotaxis or humanoid robots. Still, at this price, enthusiasm appears well ahead of the fundamentals, so moving forward with caution and keeping any position modest is likely prudent.

Personally, I won't be buying at this level.

Daniel Sparks and/or his clients have positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.