Tesla (NASDAQ:TSLA) is up 103% in the past year, and the vast majority of those gains — about 70% — have been since Trump won the 2024 election. Investors now see Elon Musk as a heavyweight in policy decisions and many now even call him the co-president. TSLA stock now trades at $424 with a $1.33 trillion valuation.
All these gains are at a time when people don’t have much faith in the EV market. Even “legacy” automotive companies are struggling to stay profitable and the vast majority of EV companies are deeply unprofitable.
Then you consider the fact that Trump has repeatedly promised an end to EV subsidies and tax cuts. He said at his inauguration that people should be free to choose what car they drive, which is a good hint that he likely plans to stick to his guns regarding EVs. In theory, you’d expect TSLA stock to be in the doldrums with all the bad news that’s coming.
But the surprising twist is that the valuation has instead exploded. Shareholders seem convinced that Musk’s alliance with Trump will keep the company afloat even if the White House dishes out tough news for EV subsidies. But should you pay such a huge premium for TSLA stock because of that? Let’s see what the market thinks.
Tesla’s forward price-to-earnings ratio is now over 130 times. A typical S&P 500 company trades closer to the low-20s, and some high-growth names with solid margins change hands at around 50 times forward earnings. Tesla’s margins are pretty good for an EV company, but the growth numbers are nowhere near good enough to justify paying that price. Analysts expect $99.5 billion for all of 2024 and $116 billion this year. This growth is unlikely to pick up considerably in the coming years.
Still, the “best-case scenario” is what’s propping up Tesla’s price right now. Investors believe that easier regulation could expand Tesla’s lead in EVs and autonomous driving. They also think improved margins and new products, like potential compact models, will bring in more customers. Some see Musk’s political ties as a free pass from Washington, though it’s unclear whether that will hold if Trump truly axes EV incentives. In my opinion, the stock’s nosebleed valuation comes from pure confidence that Tesla can shrug off any policy threats.
Moreover, Tesla is fast-tracking autonomous driving and robotaxi services. There is also the Optimus robot that Musk promises will do all your chores in a few years for just $30,000. However, all you need to do is look at FSD and see how long it’s taking. Optimus robots are far more ambitious than that. Tesla's use of humans to remotely control them just a few months ago at a company event tells me that it is far from its vision here.
Regardless, Wedbush thinks that Tesla could push into the mid-$600 range in a best-case scenario if AI and driverless technologies come together quickly. Mizuho raised their forecasts to $515 for similar reasons.
It’s not going to be very easy for Trump to roll back EV subsidies and regulatory credits. For example, there is a $7,500 federal tax credit for EVs. Trying to remove it would need congressional approval. Trump could adjust the eligibility, but there is a tough process he needs to go through first. Still, most analysts agree there is a tangible risk it could be rolled back.
“Automotive regulatory credits revenue increased $185 million, or 33%, in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Automotive regulatory credits revenue increased $714 million, or 53%, in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. These increases were driven by demand for credits in North America as other automobile manufacturers scale back on their battery electric vehicle plans.” - 10Q Q3 2024
On the other hand, if the $7,500 tax credit is rolled back, analysts like Gene Munster see that as an effective price increase of 15%. Historically, Tesla has dealt with tax credit phase-outs with price cuts instead. But with a net profit margin at 8.6% right now, I’m not sure how this is going to work out well for Tesla.
I believe that the market is overpaying for Tesla stock. You’re being asked to pay Palantir’s (NYSE:PLTR) premiums for a company that has much weaker connections with the government. Trump will be around for four years and there is nothing that suggests that Tesla will be a useful long-term partner for the Federal Government.
Elon Musk thinks that a lack of subsidies and tax credits will hurt competitors and help Tesla gain more market share. I doubt the cons of such a huge impact on its earnings will be outweighed by a potential gain in market share. Tesla’s market share is already big enough and the scaling required to offset that tax credit loss will take a lot of time. Thus, it might be a good time to lock in some profits.