Over the long term, Tesla (TSLA 3.29%) has been one of the best-performing auto stocks in history, with shares increasing by 1,580% over the last decade due to the success of its mass-market electric vehicles, such as the Model S and Model Y. However, in recent months, the company's growth story stalled. CEO Elon Musk's foray into politics has damaged Tesla's brand, while low-cost Chinese rivals pose a threat to its business model.

The next five years will make or break the company. If things go well, Tesla could transition from being just another automaker into a diversified technology giant, maintaining or even growing its $813 billion market capitalization. If things go poorly, expect the company's valuation to fall back down to earth. Let's delve deeper into what the future may hold.

Tesla stock is crashing -- or is it?

With shares down 37% year to date as of this writing, it might look like Tesla is melting down. But that's not actually true. When you zoom out, the stock is still slightly above its level from just six months ago. This dynamic means that while investors have tempered some of the arguably irrational excitement about Tesla, they remain highly optimistic about its long-term potential.

TSLA data by YCharts

Furthermore, with a forward price-to-earnings (P/E) ratio of 92, Tesla stock remains extremely expensive. For context, the S&P 500 has an average estimate of 20, while other established American automakers, such as Ford and General Motors, trade for just 8 and 4 times forward earnings, respectively.

However, the most alarming comparison is with China's BYD, which trades at a P/E of just 19, despite its fourth-quarter profits growing by 73% year over year. Tesla's profits fell 71% in the corresponding period.

Tesla's problems continued into 2025. First-quarter deliveries declined 13% to 336,681 units, primarily due to collapsing sales, particularly in the European Union, where deliveries dropped by over 30%. This negative trend is likely to continue over the coming years as new Chinese rivals expand their production capacity in Europe to avoid tariffs and other restrictions.

Protectionism is both a threat and an opportunity

Tesla's rapid decline in Europe highlights a problem in the market that may run much deeper than investors want to admit. While the Trump administration provided a "mask-off" moment, European hostility toward Tesla predates Elon Musk's overt political involvement.

Despite being a green energy leader, Tesla's gigafactory in Berlin-Brandenburg has been beset with environmental protests and vandalism despite many other facilities operating in the region. The company also faced frequent regulatory holdups in its efforts to roll out self-driving across the continent, a technology that could be one of its key advantages over the fast-growing competition.

Image source: Getty Images.

The European market has proven unreliable for Tesla. And President Donald Trump's protectionist policies could give the company an opportunity to succeed without it by focusing more on its home court.

With a 100% tariff on Chinese EVs (excluding the new 245% tariff on most Chinese products), Chinese auto imports are virtually banned from the U.S. market. And while Tesla's use of some imported components means it will be impacted by the blanket 25% tariff on all cars and auto parts, it will fare better than rivals like Ford's Mustang Mach-E, which is assembled in Mexico, and Hyundai's Ioniq 5, which is partially made in South Korea.

What the next five years might have in store

Over the next five years, investors should expect the U.S. market to potentially become a walled garden for Tesla. Its top competitor, BYD, currently has no plans to expand into the U.S. Meanwhile, a more favorable regulatory environment can help it expand its self-driving efforts and unlock an opportunity that analysts at McKinsey believe could be worth $300 billion to $440 billion by 2035. If Tesla can pull this off, the challenges in Europe and China might become distant afterthoughts.

With that said, Tesla's current valuation already seems to price in a best-case scenario. Investors may want to wait for shares to fall further or for a technological or regulatory breakthrough in its self-driving tech before considering a position in the stock.