Tesla & Trump: Risks To Consider

Tesla (NASDAQ:TSLA) stock has rallied by over 45% since November 5th, the presidential election day, with its market cap now standing at over $1.1 trillion. Musk played a pivotal role in Trump’s 2024 campaign. Besides making considerable financial contributions, he actively campaigned for Trump and used his social media platform X to boost support. Trump has now appointed Musk to lead a new advisory commission, dubbed DOGE, that intends to streamline the federal government and improve efficiency. This increasingly strong rapport between the two men has sparked hopes for regulatory shifts that could favor Musk’s many businesses, particularly Tesla. While long-term investors appear to see substantial upside for Tesla from a Trump presidency, we’d be much more circumspect about Tesla stock at current levels. Tesla trades at about $352 per share, or approximately 108x consensus 2025 earnings. This is a lofty multiple even when accounting for potential political and regulatory tailwinds. As an aside, What’s Happening With Google Stock?

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.

Subsidy Cuts, Market Share Gains

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 U.S. automakers across the board. However, investors are betting that regulations under Trump will, on balance, be more favorable for Tesla. Why? There’s a strong 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 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.

However, even substantial market share gains in the EV market would not justify Tesla’s current valuation in our view. Think of it this way. Tesla’s current market capitalization is more than the next 20 largest automakers combined. In some sense, this means that even if Tesla were to somehow effectively own the entire automotive market, it might still be overvalued. Tesla delivered under 2 million cars last year, while the total automotive market stood at roughly 90 million units. Moreover, the early adopter market for EVs appears to be saturating in countries such as the U.S. and the masses still appear concerned about range anxiety and somewhat limited charging infrastructure. In fact, buyers in the United States appear to be rediscovering hybrid vehicles, with hybrid deliveries rising 31% compared to last year in Q2. Hybrids offer the high efficiency and eco-friendly appeal of EVs, with greater convenience. 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.

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. The barriers to entry in the EV market aren’t too high as well given the lower mechanical complexity, easier manufacturing processes, and less upfront capital spending. This has meant that more new players could enter the EV market challenging Tesla. Chinese EV players too have made extremely compelling vehicles with cutting-edge batteries, self-driving technologies, and infotainment systems at very competitive prices. While it is unlikely that these vehicles will hit Tesla’s U.S. business given the current 100% duties Chinese EVs face in the U.S., strong competitors could hurt the company’s international business.

Autonomous Vehicles

Trump is also expected to boost Tesla’s self-driving business as regulations that encourage the growth of AI and autonomous vehicle technology could 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. Autonomous vehicle-related regulations are currently done at the state level, the Trump Administration is very likely to move approvals to the federal level and this could make things a lot more streamlined for companies investing in this space. That said, it’s not like Tesla is the only one innovating in this space.  Tesla’s autopilot has a solid competitor in Alphabet’s Waymo robo-taxi business. In fact, Waymo may be worth trillions to Alphabet stock.

Separately, Chinese players such as Baidu, too, have very compelling bets in the autonomous driving space. The company has already provided 8 million cumulative rides to the public as of November and the company says that its latest autonomous taxi called the RT6 is likely to cost under $30,000 per unit. Baidu has a market cap of just about $30 billion – less than 3% of Tesla’s market cap. Sure, it’s not like Baidu’s taxis are going to find their way into the U.S., but it does serve to illustrate that the technology can be developed by other companies and deployed at scale.

Tax Cuts, Manufacturing Boost

The other areas that investors believe that Trump could boost Tesla relate to trade policies and tax cuts. 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. However, these benefits will likely accrue to other automotive and energy players in the U.S. as well and we certainly don’t think this is unique to Tesla.

Tesla’s fundamental performance, too, hasn’t been that strong of late. Tesla’s revenue is poised to grow by just about 3% per consensus estimates in 2024. 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. 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 11/25/2024
[2] Cumulative total returns since the end of 2016

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