Tesla (TSLA) is back in the spotlight after CEO Elon Musk told shareholders that Tesla’s wildly ambitious AI agenda could soon include manufacturing its own chips. At the company’s annual meeting, Musk said Tesla is designing a fifth-generation “AI5” processor and will likely need to build “a gigantic chip factory” to meet demand.
He even spoke to chipmaker Intel (INTC) about the possibility of partnering on the project. Musk boasted that Tesla-designed chips would be extremely energy efficient and cheap, about a third of Nvidia’s (NVDA) power consumption at about 10% of the cost, and joked that he has “chips in his brain” today.
The news shows that Musk is doubling down on Tesla’s shift from simply selling cars to becoming an artificial intelligence and robotics powerhouse. Investors are now wondering: does this justify TSLA’s lofty valuation, or is the stock too rich for its own good?
Tesla is a global leader in electric vehicles, battery energy storage and renewable energy products. It builds popular electric vehicles (the Models S, 3, X and Y, as well as the new Cybertruck) and solar/battery systems, while aggressively pushing autonomous driving software and humanoid robots. Under CEO Elon Musk, Tesla has become the world’s largest automaker by market capitalization, around $1.5 trillion so far.
Tesla shares are holding steady in 2025, giving up October gains due to growing competition from electric vehicles, slowing sales in China, investor concerns about Musk’s salary and cautious sentiment around AI and FSD promises.
The biggest frustration for Tesla investors remains its valuation. Near the $400 level, the stock still looks expensive. Tesla trades at a forward P/E ranging from approximately 270 to 370 times, along with approximately 15 times forward sales. That’s well above traditional automakers like Toyota, which sits closer to 0.9×. Even when compared to major tech names, Tesla’s multiples are still among the highest in the market.
www.barchart.com
Musk laid out the vision that Tesla is designing its own AI chip (the so-called AI5 processor) to meet future needs for robotics and autonomous driving. He warned that even major contract factories like TSMC (TSM) or Samsung (SMSN.L.EB) can’t deliver enough volume and said Tesla will “probably have to build a gigantic chip fab,” which he called a “terafab” to get 100,000 wafer starts per month. He even floated partnering with Intel’s foundry business: “Maybe we’ll do something with Intel…it’s probably worth having conversations” to accelerate the plan. The goal is to create an ultra-efficient and economical chip.
I think the effects of this plan could be enormous or costly. If Tesla builds its own factory, it could secure dedicated capacity and tailor the process exactly to Tesla’s software stacks. But building a new semiconductor factory is expensive and risky. It could cost between $10 billion and $20 billion and years of work. In the short term, Tesla is still reliant on existing suppliers: it currently partners with TSMC and Samsung for older generation chips. Musk says a small run of AI5 chips could arrive in 2026, with mass production in 2027.
Tesla reported record revenue growth in its third-quarter earnings, but cut profits. Total revenue for the third quarter was $28.09 billion, up 12% year-over-year.
However, profits were hit by rising costs. GAAP net income was about $1.37, down 37% year-over-year, and diluted GAAP EPS was just $0.37 below street forecasts. Operating income fell to around $1.62 billion with just a 5.8% margin, dragged down by increased R&D (AI/robotics projects), stock compensation, and new fees.
Free cash flow was a bright spot: Tesla generated approximately $3.99 billion in FCF in the third quarter, a record for the company. Cash and equivalents ended the quarter at around $41.6 billion, giving Tesla plenty of dry powder.
“Even as vehicle deliveries grow, we have to invest in autonomy, artificial intelligence and future lines,” Musk said on the conference call. Musk has been known to joke, “I’m super hard on chips… I have chips in my brain” when talking about these projects. Tesla did not provide detailed numerical guidance for the fourth quarter or full year 2025. Chief Financial Officer Vaibhav Taneja said the push toward new technology is weighing on costs this year.
Wall Street analysts currently expect full-year 2025 revenue to be around $97 billion and earnings per share (EPS) to approach $1.15, up from $2.04 in 2024, reflecting pressure on margins. Additionally, management hinted that expansions like the Cybercab, Semi, and Megapack 3 are on the way for 2026, but near-term momentum will depend on consumer demand without EV tax credits.
Wall Street appears divided over Tesla’s prospects. Morgan Stanley reiterated an “overweight” rating with a $410 price target. The team highlights Tesla’s pace of delivery in the third quarter and sees long-term benefit if AI and robotics initiatives are successful, although they acknowledge that the stock currently trades at a P/E of 272 times above its fair value model.
Goldman Sachs recently raised its target to $395 with a “Neutral” rating. Goldman’s Tesla analyst warns that the stock relies heavily on Musk running humanoid robots and autonomy. He noted that if Tesla captures a huge portion of those markets, there is significant growth potential, but if competition or execution fails, there could be downside risk.
On the bullish side, Wedbush’s Dan Ives remains bullish with a “Buy” rating and a $600 target, arguing that Tesla’s long-term value creation in robotaxis and artificial intelligence is still underrated. Deutsche Bank also reiterated a “buy” with a target of $440, pointing to confidence in Musk’s broader vision.
The consensus among roughly 40 analysts is close to a “Hold,” with an average price target in the $300s, suggesting the stock could pull back 4% from its current levels. In short, some expect bigger gains if Tesla’s AI and robotics bets pay off, while others warn that with valuations already stretched thin, any stumble could hit the stock hard.
Tesla is playing a very long game. The chip manufacturing hint and AI focus keep the door open for significant future payoff, but investors must judge whether the current share price already holds too much hope. In the short term, Tesla remains primarily a car and battery company, and its profit margins have been under pressure. If you’re excited about robotaxis and Elon’s big vision, you might stick around, but if you want strong near-term numbers and a cheap valuation, TSLA might look too risky right now.
www.barchart.com
On the date of publication, Nauman Khan had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
