Revisiting Tesla as Tariff Risks Mount and Margins Slide

Tesla's fiscal 2025 tells a story of a company at an inflection point. Revenue hit $97.7 billion, up from $81.5 billion the prior year — a solid 20% growth rate that would be impressive for most companies. But for Tesla, which grew revenue 51% between 2022 and 2023, the deceleration is stark.

Net income of $7.09 billion reflects an operating margin that has compressed from the peak of 17% in 2022 to roughly 7.3%. Price cuts have driven volume but crushed margins. The market has been willing to look through this compression on the promise of FSD and robotaxi revenue — but those revenue streams remain pre-commercial at scale.

The delivery-production gap This pattern was visible earlier. Tesla produced more vehicles than it delivered in each of the past three quarters, building inventory at a time when competitors — BYD in particular — are aggressively gaining global market share.

The tariff escalation adds a new cost variable to an already pressured margin profile. Tesla sources lithium-ion battery cells from CATL and other Chinese suppliers. Even with increasing domestic battery production through the Nevada and Texas gigafactories, Chinese components represent an estimated 15-20% of the bill of materials for a Model Y.

A 25% tariff on Chinese components would add an estimated $1,500-2,500 to the cost of each vehicle. Tesla can absorb that — its gross margin per vehicle is still around $8,000-9,000 — but absorption means further margin compression at a time when investors are already watching margins like hawks.

The bigger risk is retaliation. China represents roughly 20% of Tesla's global deliveries. If Beijing retaliates against US auto companies — as it has signalled it might — Tesla's China volume faces direct risk. The Shanghai factory can serve as a hedge for non-US markets, but any restriction on repatriating profits or forced technology transfer would be a significant negative.

The consensus has been wrong before on this name. The stock has defied bearish arguments for years on the strength of Musk's vision and the market's willingness to price optionality. But the setup here is different — the core auto business is decelerating, and the optionality (FSD, robotaxis, energy) still hasn't converted to at-scale revenue.

At roughly 100x trailing earnings and a $900 billion market capitalisation, Tesla's valuation continues to embed massive optionality premium. Strip out the energy storage business (generously valued at $50-75 billion) and the FSD software potential ($100-150 billion in bull-case scenarios), and you're still paying 60-70x for the core auto business that's growing at 20% with compressing margins.

Free cash flow of $3.61 billion in fiscal 2025 is down from $4.36 billion the prior year. For a company valued at $900 billion, that's a free cash flow yield of 0.4%. Even the most aggressive growth stock investors should find that number uncomfortable.

Analyst consensus has become notably more cautious: the target of $317 implies modest upside, and the buy/hold/sell split at 17/14/10 is the most balanced it's been in years. The street is losing conviction.