Tesla’s Lofty Valuation Faces Scrutiny from Famed Short Seller

Michael Burry, the investor who gained fame for his prescient bet against the U.S. housing market in 2008, has turned his analytical focus to Tesla. His assessment is stark, labeling the electric vehicle pioneer as “ridiculously overvalued” with a market capitalization of $1.4 trillion. He further contends that shareholders are being systematically diluted by the company’s compensation practices. This critique raises a pivotal question for the market: can Elon Musk’s vision continue to justify the premium, or are the bears poised to be proven correct?

A Shifting Narrative and Stalling Growth

Burry’s analysis, detailed in a recent Substack newsletter, takes direct aim at the evolving story around Tesla. He observes a pattern where the company’s dominant narrative shifts as competition intensifies. Initially, the focus was entirely on electric vehicles until rivals emerged. The emphasis then moved to autonomous driving technology, again until competitors entered the space. Now, Burry notes, the narrative is centered on robotics and the Optimus humanoid robot, anticipating the same competitive dynamic.

This shift in focus coincides with a notable deceleration in Tesla’s core business. Vehicle delivery growth stalled in 2024 and reversed into a decline for 2025, prompting increased attention on future projects like the Cybercab robotaxi.

The Dilution Dilemma and Soaring Valuation

A core component of Burry’s critique is shareholder dilution. He calculates that Tesla dilutes existing shareholders by approximately 3.6% annually through stock-based compensation, with no share buybacks to provide an offset. For context, Amazon’s annual dilution rate is about 1.3%, while even Palantir—a company known for high stock compensation—comes in at 4.6%, only slightly above Tesla’s rate.

Burry explicitly links this trend to Elon Musk’s recently approved compensation package, valued at a trillion dollars, warning that “the dilution will certainly continue.”

The valuation metrics supporting his bearish stance are striking. Tesla currently trades at a price-to-earnings (P/E) ratio of roughly 295. Meanwhile, the company’s earnings are declining for the second consecutive year. For most high-growth tech firms, a P/E over 50 is considered aggressive. Based on current figures, Tesla’s stock would need to fall by around 80%, or its earnings would have to increase sixfold, to reach a P/E of 50.

Should investors sell immediately? Or is it worth buying Tesla?

Regional Challenges and Technical Concerns

The competitive and operational pressures are particularly acute in specific markets. In Europe, Tesla’s challenges are mounting. October deliveries plummeted by 48.5% year-over-year, even as the overall European EV market expanded by 26%. For the full year, Tesla’s European sales are tracking for a decline of approximately 30%. Volkswagen has already overtaken Tesla in the region, selling three times as many vehicles through September.

Further complicating the landscape, new data indicates that European customer willingness to purchase Chinese electric vehicles has increased by 16% over the past twelve months, presenting an additional hurdle for the U.S. automaker.

Adding a technical dimension to the concerns, a European EV repair specialist, Croatia-based EV Clinic, has warned of “catastrophic” failure rates for specific LG batteries used in Model 3 and Model Y vehicles. While Panasonic batteries are estimated to last about 250,000 miles, the Chinese-made LG NCM811 packs are reportedly failing at around 150,000 miles, with cell-level repairs deemed impossible in over 90% of cases.

Divergent Views on Wall Street

Despite Burry’s comprehensive critique, Wall Street analysts remain divided. Mizuho Securities reduced its price target on Tesla from $485 to $475 but maintained its “Outperform” rating. Melius Research goes further, labeling Tesla a “Must Own” stock. Their thesis argues that in the multi-trillion dollar autonomous driving sector, “hundreds of billions of value” will ultimately flow to Tesla.

The fundamental debate for investors is now framed in stark terms: Will the promise of Musk’s long-term vision for robotics and autonomy ultimately eclipse the present-day realities of valuation, dilution, and competitive pressure, or has the legendary short-seller identified another major market mispricing?