Tesla (TSLA 3.91%) continues to be a volatile business to own. Yes, the shares have soared 463% in the past five years. However, they are currently 30% off their peak price from December last year.

There's no doubt that this is an iconic company that's aiming to shape the future of technology. And investors might view the current dip as too good of an opportunity.

Should you buy this "Magnificent Seven" stock while it's trading below $350? Let's take a closer look at the bull and bear cases for Tesla.

Innovation and disruption

Tesla's biggest bull case rests on its success at innovating and disrupting the global car industry. Tesla deserves credit for making electric vehicles (EV) popular. Credit also goes to the build-out of the Supercharger network that added utility for consumers.

Today, Tesla offers five EV models. And according to CarEdge, it has 44% EV market share in the U.S., putting it well ahead of second place General Motors domestically. And globally, Tesla is behind only BYD Company. Nonetheless, Tesla's rapid growth spurred EV investments from other auto makers.

Another reason that investors might want to buy the stock is because of Tesla's greater ambition. Perhaps the company's ultimate goal is to one day launch a global fleet of robotaxis, which could see "quasi-infinite" demand. Ark Invest believes this could introduce a massive, multitrillion-dollar opportunity for Tesla.

There's also the potential of the Optimus Robot. Tesla says it could start selling these to other businesses next year.

Part of the allure of owning Tesla shares is being able to place a bet on founder and CEO Elon Musk. Despite what you might think about his recent push into the political arena, or the fact that he has what seems like a million different things all fighting for his time and attention, he is arguably the most visionary corporate executive of our time. Investors might appreciate his ability to spot new trends and position Tesla to take advantage of them.

Lofty expectations for a car company

Tesla is a classic "story stock." Investors are glued to every word Musk says, making the narrative drive the share price. This means that valuation can get far away from reality, as is the case today.

Right now, the stock trades at a price-to-earnings (P/E) ratio of 166. Any reasonable analysis of the company would point to this being an insane valuation to pay. This becomes clear when viewing Tesla's business as it currently stands.

In 2024, 77% of revenue was derived from EV sales. This automotive revenue figure declined 8% year over year, driven by the first-ever drop in unit deliveries. Obviously, this is not a good trend. Profitability is also taking a hit.

Tesla's financial performance now resembles a traditional auto maker instead of some high-flying tech enterprise. Growth is slowing. Higher interest rates, inflationary pressures, and more competition in the EV market are all negative factors working against Tesla.

The valuation implies flawless execution on the part of Musk and Tesla. In fact, the P/E ratio is based on the belief of what Tesla could become one day, not what it is right now.

But it's not a virtual certainty that a worldwide robotaxi service will be launched, for example. If history is any indication, we are still a long way from this technology not only being fully developed but from humans feeling comfortable and safe using it. There's still a ton of uncertainty.

Tesla shares trade below $350, well off their record high. Investors might want to buy the dip. In my opinion, though, it's best to pass on the stock. There are some rosy expectations embedded in the valuation that make the downside significantly higher than the upside.