What Musk’s Gamble On Trump Means For Tesla Stock

It’s no secret that Donald Trump admires Tesla (NASDAQ:TSLA) CEO Elon Musk—and perhaps more importantly, values the votes Musk might bring from his passionate fan base. Musk, in turn, has reciprocated the sentiment and appears to hold significant influence with the Presidential candidate. That being said, the Biden Administration policies have been pretty good for Tesla. The car market has benefited from the sizable incentives for electric vehicles (EVs), including the $7,500 tax credit for U.S.-made EVs and the removal of the eligibility cap of 200,000 vehicles, a provision that previously hurt Tesla. Republicans, on the other hand, generally oppose government subsidies for EVs and renewable energy, favoring a free-market approach. Trump has taken an aggressive stance as well, suggesting that he would end the federal electric vehicle mandate on day one if elected. However, despite the potential continuity of regulatory sops under Democrats, the Tesla CEO is wagering that the company might fare better under Trump. Surprising? Not really.

Can Tesla Thrive Without Subsidies?

We believe that in a subsidy-free, market-based system, Tesla is well-positioned to not just survive, but thrive, on account of its position as one of the lowest-cost producers among EV manufacturers. The company has consistently demonstrated discipline in managing its fixed costs, including R&D and SG&A, which has enabled it to maintain profitability even in tough market conditions. Tesla has vertically integrated its operations – it controls a bulk of its supply chain, ranging from battery production to software development, and has considerably automated its manufacturing process. Tesla’s so-called Gigafactories also play a big role in its cost structure by boosting economies of scale for battery production. Tesla also rarely spends on splashy advertising. All these factors have contributed to low costs and thicker margins. In the most recent quarter, Tesla posted a 7% adjusted profit margin, despite industry-wide headwinds and declining volumes. The company posted an impressive 17% margin for the fiscal year 2022 when the EV market was much more favorable.

As government subsidies are potentially reduced or more likely eliminated under Trump, Tesla’s lower cost base becomes a critical advantage. In a market where EV manufacturers can no longer rely on subsidies to offset inefficiencies, Tesla’s superior operational efficiency will potentially allow it to outlast its less efficient competitors. For example, Rivian – one of Tesla’s key competitors, despite having a very compelling vehicle lineup – has been hemorrhaging around $1.4 billion per quarter over the past two quarters. Without the support of government incentives, companies like Rivian could face a much more uncertain future. And it’s not just Rivian. Other automakers, including U.S. giants like GM and Ford, could also struggle in a subsidy-free landscape. Neither has yet achieved the scale or cost efficiency required to make their EV operations profitable. GM, for instance, sold just 22,000 EVs in Q2 2024, out of a total of about 696,000 vehicles. This limited volume makes it difficult to achieve the same economies of scale as Tesla. Foreign automakers from Korea and Japan, who planned to invest billions in the U.S. to capitalize on the $7,500 EV credit, may also rethink their expansion in the U.S. market.

The performance of TSLA stock with respect to the index over the last 3-year period has been quite volatile. Returns for the stock were 50% in 2021, -65% in 2022, and 102% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.  Despite the wild stock fluctuations, Tesla is set to thrive, even in less favorable regulatory environments.

Trade Barriers Can Give Tesla A Leg Up On Chinese EVs

Moreover, Trump’s trade policies could strengthen Tesla’s position relative to its Chinese rivals. While the U.S. has already imposed a 100% tariff on Chinese EVs, Trump has suggested the possibility of a 200% duty on Chinese EVs built in Mexico and imported into the U.S. This would create significant headwinds for Chinese automakers trying to penetrate the U.S. market. Though Trump has invited Chinese automakers to build factories in the U.S., it’s unlikely that they will make such a move, given their significant capacity investments in China and the unpredictable regulatory environment. Most Chinese EV players – except BYD and Li Auto—remain loss-making and it isn’t clear if their manufacturing operations would be viable anywhere else in the world with a lack of government support and higher labor costs.  Even BYD, which is now the world’s largest EV maker, posted net margins of under 5% in the most recent quarter, despite robust demand and support in China. This is below Tesla’s margins. As tariffs and trade barriers increase, Tesla’s focus on domestic production and its cost efficiency could give it a meaningful edge over both its domestic and foreign rivals.

Tesla’s Energy Business Should Hold Up

Trump has been a proponent of boosting fossil fuel production and cutting down on subsidies for renewables. However, Tesla’s battery business is well-positioned to thrive regardless. The renewable energy market is expected to grow due to increasing cost competitiveness and global environmental concerns, making government policy less of a determining factor. Per the IEA, global renewables capacity could increase to 2.5x its current level by 2030 and renewables are expected to become the largest source of global electricity generation by 2025, meaning that the need for energy storage will only intensify. Storage solutions address the intermittency of renewable power by storing excess energy and discharging it when demand is higher. Tesla’s energy division has been expanding rapidly, driven by its battery technologies. In the last quarter, the company deployed a record 9.4 gigawatt-hours (GWh) of storage solutions, fueled by demand for its Megapack and Powerwall products.  Tesla has a competitive edge in energy density, cost, and software integration for its batteries, and its significant investment in manufacturing capacity strengthens its position. Even without government support, Tesla’s energy business should be able to capitalize on the growing renewable energy market. A closer look at Tesla’s fast-growing Clean Energy business. 

While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/27/2024
[2] Cumulative total returns since the end of 2016

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