Why Tesla Stock is Up 18% Since Weak Q1: Should You Book Profits?

Electric vehicle (EV) biggie Tesla TSLA had a rough start this year. It saw its sales slipping across all key regions, including the United States, China and Europe. Rising competition and generous discounts hit demand and margins. CEO Elon Musk’s political distractions didn’t go down well with investors. He faced significant backlash from Democrats, including boycotts and vandalism. Tesla’s brand shine is no longer the same as it was earlier. Amid these challenges, the stock has declined 30% year to date.

However, shares of the company have risen 18% since the latest quarterly results. And that comes despite Tesla missing top and bottom-line estimates and witnessing a year-over-year dip in sales and profits. Automotive gross margin came in at 11.3%, down from 15.5% reported in first-quarter 2024. (Find the latest earnings estimates and surprises on Zacks Earnings Calendar.)

What could explain this rally after disappointing first-quarter 2025 results? Precisely three factors.

Musk Dialing Down on DOGE Time: Musk has said that his time allocation to U.S. President Trump’s Department of Government Efficiency (“DOGE”) will reduce significantly beginning this month. The CEO’s growing involvement in politics was one of the big reasons behind Tesla’s decreasing brand appeal. With Musk stating that he is shifting his focus to Tesla, investors are breathing a sigh of relief and hoping that his undivided attention will help bring back Tesla’s lost glory.

Affordable Model Coming: Tesla remains committed to starting the production of affordable vehicles in the first half of this year. As the race to budget-friendly EVs is heating up, markets are appearing optimistic that the new low-cost model would help boost sales volumes.

Robotaxi Launch on Track: Whether Tesla would launch its pilot Robotaxi program in Austin this summer was one of the biggest questions on investors’ minds before earnings release. Tesla has missed or delayed timelines many times before. Given macroeconomic uncertainties and tariff issues, clarity and an update on the robotaxi launch were much needed. Musk’s reiteration of plans to launch the company’s robotaxi services in Austin this June came as a vote of confidence.

But Should TSLA Investors Get Too Excited?

While Musk will now devote much more time to Tesla, let’s not forget that significant damage has already been done. There’s a lot that’s not working for the company now and there’s a lot more that he has to prove to regain investors’ faith.

As Tesla sales are faltering, China’s EV giant BYD Co Ltd. BYDDY is seeing a strong surge in deliveries.  In the first three months of 2025, BYD delivered 416,388 battery electric vehicles, surpassing Tesla’s 336,681 units for the same period. This was the second straight quarter in which BYD held the title of the world’s top EV maker. With rapid expansion and cutting-edge technology, BYD is challenging Tesla’s long-time dominance.

While Tesla is yet to launch a low-cost EV, BYD is already leading the charge on that front. In fact, many companies have either already rolled out inexpensive models or they will by the year-end. Whether Tesla’s budget-friendly EV can significantly boost sales remains to be seen.

While investors are pinning massive hopes on AI-trained self-driving taxi services, they should also remember that time is not on Tesla’s side. Alphabet’s GOOGL Waymo is currently dominating the small but growing autonomous ride-hailing market. With years of experience, extensive real-world testing and strategic partnerships, Waymo is already running commercial services in multiple cities. Alphabet has committed $5 billion to the effort and Waymo looks ready to cement its dominance.

Meanwhile, Musk believes Waymo’s cars are too expensive and made in low volumes, relying on costly sensors instead of Tesla’s camera-based AI approach. He sees Tesla's low-cost, high-volume strategy and in-house AI and chip capabilities as giving it a major competitive edge, and he doesn’t view Alphabet’s Waymo—or anyone else—as real competition right now. But that’s classic Musk— confident and bold. Let’s hope his vision holds up and these claims don’t come back to haunt him.

What Do Estimates Say for Tesla?

The Zacks Consensus Estimate for Tesla’s 2025 EPS implies a 22.3% year-over-year decline. The estimates are also witnessing southward revisions.

TSLA is Quite Overvalued

From a valuation perspective, Tesla appears quite pricey. Going by its price/sales ratio, the company is trading at a forward sales multiple of 8.57, higher than its peer group’s 0.59.

The valuation premium is certainly hard to justify on fundamentals alone. Markets are seemingly pricing in transformational success in areas like autonomous driving and humanoid robotics, both of which remain high-risk and unproven frontiers for the company now.

Here’s How to Play Tesla Shares Now

Tesla’s core business is showing signs of strain. Musk has already walked back his 2025 vehicle growth target from 20–30% to more modest expectations. Now, amid global tariff uncertainty and ongoing challenges in China, the company hasn’t even reaffirmed those lower targets. Instead, it plans to revisit its 2025 delivery volume guidance in the next quarterly update.

Tesla’s long-term story hinges on scaling autonomous vehicles and humanoid robots. Progress in Full Self-Driving approvals and robotaxi development will be key drivers of future growth. If Tesla executes well on these fronts, the stock could see a strong rebound.

However, it's still too early to invest purely in these promises. New investors may be better off waiting for clearer signs of execution. With downward estimate revisions, valuation concerns and lingering macro uncertainties, existing shareholders might even consider taking some profits off the table.

Tesla currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of F.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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This article originally published on Zacks Investment Research (zacks.com).

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