Tesla shares experienced a sharp reversal this week, shedding 4.6% on Wednesday after hitting a record high just a day earlier. The sell-off was triggered by regulatory pressure from California, a crucial market for electric vehicles in the United States. The decline coincided with broader weakness across the artificial intelligence sector.
A Valuation Built on Future Promise
The market’s perception of Tesla has diverged dramatically from its core automotive operations. Analysis from William Blair suggests the traditional vehicle business is now valued at only $30 to $40 per share. This means over 70% of the company’s total market capitalization is attributed to its autonomous driving division. Notably, Tesla’s energy storage business has reached a valuation comparable to its entire car manufacturing segment.
Trading at a price-to-earnings ratio exceeding 320, the company is clearly not being judged as a conventional automaker. “Investors are viewing Tesla through the lens of autonomy and energy, not through traditional automotive metrics,” explained William Blair’s Jed Dorsheimer.
DMV Deadline Over “Self-Driving” Claims
The immediate pressure came from the California Department of Motor Vehicles (DMV), which delivered a 60-day ultimatum to the automaker. Tesla must revise how it advertises its driver-assistance systems or face a potential 30-day suspension of its dealer license. This action formally adopts a ruling from an administrative judge last November.
The regulator alleges Tesla violates state law by using terms like “Full Self-Driving Capability” and “Autopilot” for features that do not enable autonomous operation. However, Goldman Sachs analysts downplay the risk of a significant business disruption, noting Tesla has previously adopted alternative nomenclature for its systems when faced with regulatory scrutiny.
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Progress on Autonomy Amid Setbacks
Despite the stock’s pullback, Tesla continues to advance its autonomous driving ambitions. In Austin, Texas, the company is testing fully driverless robotaxis without a safety operator behind the wheel. CEO Elon Musk has announced plans to deploy 500 such vehicles in Austin and 1,000 in Silicon Valley by the end of the year.
This progress is bolstering analyst confidence. Mizuho raised its price target from $475 to $530, citing research indicating Tesla’s software now operates without driver intervention over 99% of the time. Wedbush maintains a street-high target of $600, emphasizing that Tesla is taking “meaningful strides on its path to an AI revolution, with autonomy and robotics central to the 2026 vision.”
Morgan Stanley Strikes a Cautious Tone
Not all outlooks are bullish. In early December, Morgan Stanley downgraded Tesla stock from “Overweight” to “Equal-Weight” for the first time in two years. Analyst Andrew Percoco reduced his 2026 delivery forecast by 10.5% and cut cumulative delivery estimates through 2040 by 18.5%. He cited intensifying global competition and execution risks surrounding the robotaxi and humanoid robot initiatives.
Percoco warned of a “bumpy trading environment” over the next twelve months, suggesting the potential of Tesla’s non-automotive ventures is already reflected in its share price.
Tesla equity recovered somewhat in pre-market trading on Thursday. While the stock shows a six-month gain of approximately 47%, its year-to-date performance lags behind the Nasdaq index. With a market capitalization above $1.5 trillion, the valuation primarily mirrors the expectation that Tesla will successfully transform into a leading AI and robotics enterprise.
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