Trump Boosts Tesla, But Risks Loom

Tesla (NASDAQ:TSLA) stock gained 9% in Monday’s trading, closing at about $350 per share. The stock has been up almost 40% since November 5th, the day of the presidential election. Tesla stock now trades at levels last seen around early 2022 and its market cap now stands at over $1.1 trillion, up more than $300 billion in less than a week. Investors are optimistic given Tesla CEO Elon Musk’s increasingly close relationship with President-elect Donald Trump. Musk played a pivotal role in Trump’s 2024 campaign, making considerable financial contributions, actively campaigning for Trump, and using his social media platform X to boost support. While some of the recent gains are likely attributable to short covering, as short sellers are being forced to buy back shares to cut their losses given the size of the gains last week, long-term investors, too, see a lot of upside for Tesla from a Trump presidency. See how Trump can drive Tesla Stock To $1,000

The performance of TSLA stock with respect to the index over the last few years has been quite volatile. Returns for the stock were 50% in 2021, -65% in 2022, and 102% in 2023. The stock has returned 44% year-to-date in 2024. 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.

How Exactly Does Tesla Benefit From Trump?

Now Tesla doesn’t get any substantial grants or direct contracts from the federal government. The bulk of the benefits the company derives – including the $7,500 tax credit for EV purchases and emission credit sales – are incentives that are available to all automakers across the board. However, investors are betting that regulations under Trump will, on balance, be more favorable for Tesla. Why is that? There’s a good possibility that government subsidies for electric vehicles (EVs) will be reduced or eliminated under Trump. While this would hurt other EV players – such as Rivian, GM, and Ford – whose EV operations remain deeply loss-making, it could benefit Tesla which is one of the lowest-cost producers in the EV industry. Tesla’s ability to control costs and maintain profitability gives it a distinct edge over less efficient competitors in a more free market environment, potentially allowing it to gain market share.

Besides this, Trump’s trade policies could further boost Tesla’s edge. Think higher tariffs on imported EVs or potentially greater access to international markets, as Trump pushes for the removal of tariffs on American goods and focuses on more symmetric trade policies. Trump has also been a big proponent of tax cuts, particularly for U.S.-based manufacturers and this could benefit Tesla which does a bulk of its energy systems and EV manufacturing in the U.S. Moreover, regulations that encourage the growth of AI and autonomous vehicle technology may very well be shaped to Tesla’s advantage. For example, with fewer regulatory hurdles, Tesla could speed up the rollout of its self-driving features, solidifying its leadership in the autonomous vehicle market.

No Magic Bullet For Tesla

As things stand, Tesla’s business has been a mixed bag in recent quarters due to cooling demand for its EVs and surging competition. Tesla’s revenue is poised to grow by just about 3% per consensus estimates in 2024. Investors hoping for a quick turnaround in Tesla’s business under Trump will likely need to temper their expectations, given that many of the issues Tesla is facing are related to competition and the overall state of the EV market. Tesla’s product lineup is showing its age. The Model S for example, was first launched in 2012 and has only seen incremental design updates periodically. This aging product lineup is starting to pale in comparison to newer EV offerings, particularly from competitors in China, where manufacturers are producing a diverse range of high-tech electric vehicles.

Moreover, the early adopter market for EVs appears to be saturating, reducing the pool of first-time buyers. Tesla’s aggressive price cuts over the past year, aimed at spurring demand, also appear to have lost their initial impact, as price competition grows fiercer. Automotive gross margins stood at around 16% in the most recent quarter, excluding the impact of tax credit sales, down from about 29% in late 2021. Tesla’s valuation post the recent rally is hardly cheap.

The stock trades at a lofty 100x estimated 2025 earnings – and it might take quite a bit of time for the company to grow into this rich valuation. There’s very little room for error if growth does not accelerate in the coming years. We value Tesla stock at about $240 per share, which is well below the market price. See our analysis on Tesla Valuation: Is TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla Revenue: How Does TSLA Make Money?

[1] Returns as of 11/12/2024
[2] Cumulative total returns since the end of 2016

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