On the road to nowhere – a look at Tesla’s performance
An oft-made and persistent mistake investors make is assuming what’s worked recently will continue to work indefinitely.
Referred to as ‘representativeness” it’s a psychological recency bias trap. Essentially, the comfort of the current winners prompts us to ‘bottom drawer’ them and simultaneously blinds us to the inevitability of economic cycles. Indeed, despite historical evidence of economic cycles and industry leadership change, we prefer the path of least resistance, which means hanging onto current winners, hoping they will always be so.
Consider the consequence of your portfolio reflecting last decade’s trends; you would have missed much of the artificial intelligence (AI) boom as well as the systemic risk hiding in plain sight. History tells a very different story from the one currently being told by the market’s biggest winners.
Over the past four decades, the composition of the largest companies in the S&P 500 has changed with monotonous regularity. What dominated in one era rarely maintained that position in the next. In the past it was energy, industrials, and then financials that dominated the leaderboards. Today its technology. Each have had their moment in the sun and in a decade’s time, if history is any guide, it will be something else.
Concentration always, but never consistent
Back in 1985, the top ten U.S. companies were worth a combined US$251 billion and included names like DuPont, Kodak, IBM, General Motors, GE, and Exxon. Twenty years later, in 2005, the top 10 had shifted to a US$2.4 trillion cohort including AIG, Pfizer, Walmart, and Microsoft. Fast forward another two decades to 2025, and the top ten is a US$19.4 trillion behemoth dominated almost entirely by technology-driven entities like Broadcom, Meta, Alphabet, Amazon, Nvidia, Apple, and, of course, Tesla.
Despite the compelling narratives and widespread investor confidence that supported each of these eras, leadership changed anyway. It didn’t happen because the underlying companies suddenly became irrelevant, but because markets evolve and economic conditions shift.
Capital flows adjust to chase new inventions and ideas and that capital fuels new sources of growth while older themes mature and even tire from boredom.
An interesting aside, what’s notable is that the aggregate size of the Top 10 companies as a percentage of the total market remained stable for nearly forty years before suddenly doubling. The result is extreme concentration.
Today’s concentration reflects real innovation, but history suggests that such extreme leadership is often a signal of a transition rather than a ‘permanently higher plateau’.
The question for you is how much of your equity portfolio is implicitly assuming today’s leaders will remain dominant for another decade. If history is any guide, the environment ahead will look nothing like the one we have just experienced. That means you need to be particularly aware of extreme price-to-earnings (P/E) ratios, which imply ongoing leadership and uninterrupted double-digit growth.
And when the rebalancing occurs, the greatest risk is not volatility, but being positioned for the wrong version of the future.
Tesla
Nowhere is this risk more concentrated and gobsmacking than in Elon Musk’s orbit. To understand the distortion of the current market, one just has to look at the wealth of the man at the centre of the company.
Forbes currently puts Musk’s net worth at approximately US$776 billion, a figure so vast it defies imagination. Think of what you can do with US$1 million. Musk has 776,000 of those. It’s reported that Musk’s personal fortune is roughly equal to the Gross Domestic Product (GDP) of entire nations like Ireland, Belgium, Sweden, or Israel. And evidently, he wants or needs more.
Tesla shareholders recently approved a pay deal that could potentially total US$1 trillion if certain requirements are met – which I doubt they will be. But even the more immediate figures are staggering; this month, it was revealed Musk’s compensation for 2025 could total US$158.4 billion. If correct, it’s approximately double the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) that Tesla has generated in the last 26 years.
The discussion inevitably leads to the valuation of Tesla itself, which currently trades at a price-to-earnings (P/E) ratio of 357 times.
Compare that to Nvidia, a company currently printing cash and at the heart of the AI bubble. Nivida trades on a P/E of 41. Google sits at 29, and Microsoft at 25.
Tesla is priced not as a car company, or even a tech company, but as a miracle-making cult – a cult that has sidestepped the consequences of missteps that would have destroyed lesser companies permanently.
Self-driving on the road to nowhere
The most recent crack to appear is becoming impossible to ignore. During the Tesla Q1 2026 earnings call (held in late April 2026), Elon Musk made a significant admission regarding the technical limitations of Hardware 3 (HW3). Elon Musk admitted on that call that Hardware 3 simply does not have the capability to achieve unsupervised Full Self-Driving (FSD).
In fact, Musk explicitly stated that vehicles equipped with Hardware 3 – the computer suite used in millions of Teslas – cannot achieve unsupervised Full Self-Driving (FSD). Since 2016, Musk has promised that every car being produced had “all the hardware necessary” for full autonomy. In the recent call Musk acknowledged that although Tesla had previously believed HW3 would be sufficient, the complexity of current AI models has outstripped the hardware’s capabilities.
In fact, Musk noted that the memory bandwidth of those vehicles is only one-eighth of what Hardware 4 requires.
One suspects this news would be devastating for the four million Tesla owners currently on the road with Hardware 3, many of whom paid between US$8,000 and US$15,000 for the capability promised since 2016. Indeed, as recently as 2022, Musk was publicly assuring owners that HW3 was sufficient. Those promises are now officially broken.
The proposed solution to this hardware failure is not a refund or a free upgrade, but a “discounted trade-in” toward a new car equipped with Hardware 4. This is essentially asking customers to pay for the privilege of fixing a broken promise. With nearly 300,000 FSD purchasers affected, Tesla’s potential liability runs into the billions. Furthermore, when Musk was asked whether the current FSD version 14.3 was ready for unsupervised deployment, he initially said yes, only to walk it back immediately, admitting that “major architectural improvements” were still needed.
While the stock market initially popped on news of a ‘double beat’ in revenue and earnings, a look into the actual U.S. Securities and Exchange Commission (SEC) filings reveals a much bleaker reality. Tesla reported US$22.4 billion in revenue and US$0.41 in non-Generally Accepted Accounting Principles (GAAP) earnings, but the driver of this income wasn’t innovation or volume growth. The company’s own shareholder letter listed “one-time benefits related to warranty and tariffs” as the primary reason for the improvement.
Tesla released warranty reserves and booked tariff refund windfalls to make the quarter look healthy. They also stretched supplier payments and took on billions in new debt while presenting metrics that stripped out over US$1 billion in stock-based compensation. When you look at the GAAP net income of US$477 million on US$22.4 billion in revenue, the net margin is a paltry 2.1 per cent.
For a company with a US$1.4 trillion market cap, this is more than just a disconnect. If you annualise that quarterly GAAP profit, you get a trailing P/E ratio north of 700. Even using adjusted numbers, the company is trading at 250 times earnings. Clearly investors are still putting value on the ‘options’ of robots, batteries and space.
But those options cost money and the financial pressure is mounting. Tesla recently raised its 2026 capital expenditure guidance to over US$25 billion, a US$5 billion increase in a single quarter. This is three times the company’s historical annual capital expenditure (capex) run rate.
Tesla’s CFO has already confirmed the company expects negative free cash flow for the remainder of the year. This creates a problem that’s impossible to solve without further diluting shareholders. You have a company that generates roughly US$6 billion in free cash flow in a good year, planning to spend US$25 billion. They will almost certainly need to issue equity, which means the current earnings will be spread across even more shares, further devaluing the stock.
The car business
For as long as I have been talking to investors, I have explained the car business is a tough one. It’s a capital and machinery-intensive, land-intensive business where you make heavy fashion items, with tastes and themes changing annually. Tesla’s core automotive business is deteriorating in real time (China’s brands will eventually experience the same).
Tesla delivered 358,000 vehicles in the first quarter, missing estimates, while producing 408,000. This means 50,000 cars are sitting on lots, unbought and depreciating. Inventory days have jumped from 10 to 27 in just a few quarters. Even in California, Tesla’s most friendly and vital market, registrations declined, nay slumped, 24 per cent year over year (YoY), with market share falling from 9.2 per cent to 7.7 per cent.
The company’s entire valuation rests on the story of robotaxis and autonomy, but even that story is being debunked by the competition. Waymo, today’s leader in autonomous driving, completed 15 million rides in 2025 and operates commercially across six cities. Waymo recently raised capital at a US$126 billion valuation – that’s the market’s verdict on what a leading, functional robotaxi company is worth.
According to some analysts, if you assign Tesla the same US$126 billion valuation for its robotaxi business – despite it being years behind Waymo in actual deployment – it equates to about US$33 a share. If you add the automotive business at generous industry multiples, you might arrive at another US$20. Add energy storage and services, and you are looking at a sum-of-the-parts value of roughly US$65 to US$70 a share.
Yet, Tesla is trading at US$387. Investors are paying for a narrative that is increasingly detached from the physical and financial reality of the company. But they have been doing this for a long time. The cult of Musk is indeed very powerful.
The result is what one observer described as one of the most egregious “mispricings” in the history of the modern market. Tesla is a case study in what happens when the market ignores the lessons of the last four decades and decides that this time, and this one leader, is different. The laws of physics and economics eventually apply to everyone – even those worth US$776 billion.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
