Less than two months ago, Tesla Inc. shares were on track for their third year of losses in the electric vehicle maker’s decade and a half of trading.. But after a furious recovery in the last seven weeks, The stock is suddenly among the top performers in the S&P 500 Index by 2024.
What happened to cause the change? Nothing in the company, where demand for its cars remains unstable and the future seems increasingly uncertain. Rather, it was what investors consider a political masterstroke by Tesla leader Elon Musk by aggressively supporting President-elect Donald Trump on the campaign trail and taking an unofficial role in his administration.
“How can you put a value on the fact that Musk has broad access to the incoming administration?” said Steve Sosnick, chief strategist at Interactive Brokers. “You can assign virtually any number.”
Investors appear to be doing just that. Before the US presidential election, Tesla shares were down 2.3% for the year. Since election day, they have shot up 73%, putting them at 69% by 2024. This means that, in less than two monthsthe electric vehicle maker has added a staggering $572 billion to its market capitalization, putting it around $1.4 trillion, although nothing about the company has fundamentally changed.
Tesla shares slowed their advance this week, losing 3.5% after rising more than 12% in each of the previous two weeksas the Fed’s hawkish turn sparked a broader sell-off in stocks. Saturday marks the fourth anniversary of the stock’s addition to the S&P 500.
The company did not respond to a request for comment.
Despite Trump’s well-known aversion to electric vehicles, investors appear to be betting that Musk’s continued closeness with the administration will pave the way for Tesla’s ambition to build a fully autonomous vehicle. Several Wall Street analysts have dramatically raised their price targets for the stock. They believe that the Trump White House will be a turning point for self-driving technology and that Tesla’s alignment with the new administration will benefit the company by relaxing regulations.
wobbly platform
But at the same time, the EV maker’s profit and revenue expectations for 2024, 2025 and 2026 have plummeted this year. And it remains unclear when his robotaxi initiative will start making money. That uncertainty about the coming years worries some investors, as Tesla’s enormous market value is based on an unstable platform.
“Tesla Stock Faces Huge Headwinds in 2025”said Chris Gannatti, global director of research at Wisdomtree. “It is difficult to imagine a bullish scenario from now on.”
According to Evercore ISI analyst Chris McNally, between $500 billion and $600 billion of Tesla’s market capitalization is based on its electric vehicle and energy businesses, with the rest attributed to “things to come,” such as cars. autonomous and humanoid robots. And calculations by Nicholas Colas, co-founder of DataTrek Research, show that more than 90% of Tesla’s stock price is tied to what the company can do in the future.
You can see it in the company’s earnings valuations relative to another high-flying company: AI chip giant Nvidia Corp. Until recently, Nvidia was considered the most attractive stock on the market. Now it’s Tesla’s turn. But based on their price-earnings ratios, these are two very different companies. Nvidia is currently trading at 32 times its projected earnings for the next 12 months, while Tesla is trading at 129 times.
This is a substantial gap, particularly in light of the risks facing Tesla’s performance in the near term. The Trump administration wants to cut federal subsidies for electric vehicles, which will make the already expensive vehicles even more expensive than gasoline-powered cars. About two-thirds of Tesla’s sales in the United Statesor about 20% of its global sales, benefit from the tax credit, Barclays analyst Dan Levy wrote in a note to clients this week. However, the move is likely to hurt the company’s smaller domestic competitors the most, which could benefit Tesla by further consolidating its position in the market.
However, betting on a relaxation of the rules is risky, because it may take a while to do so. And even if it happens, there’s little indication that Tesla’s Cybercab will be ready to hit the streets. If anything, relaxing the rules before Tesla’s technology gets where it needs to be risks benefiting Tesla’s main robotaxi competitor, Alphabet Inc.’s Waymo.
“It is not regulation that is holding Tesla back in terms of autonomous driving,” said Thomas Thornton, founder of Hedge Fund Telemetry.
betting on power
Theories abound on Wall Street about the parabolic rise in Tesla’s stock price. Investors want to bet on Musk’s growing power in Washington; the large number of followers of the company among Retail traders are driving the movement. And Trump’s election victory could transform the electric vehicle maker and deliver huge future benefits.
“People who bet against Musk and Tesla have always been wrong,” said Cole Wilcox, portfolio manager at Longboard Asset Management. “There is nothing standing in your way that can prevent you from executing your visions now.”
In many ways, Tesla and Bitcoin have become the face of the post-election rally sparked for the return of animal spirits to the markets.
“This rally is reminiscent of the movements we saw in 2020 and 2021, only this time the Tesla story has many more intangibles,” said Sosnick of Interactive Brokers. The stock gained over 740% in 2020 and then rose another 74% through November 4, 2021 to set a new all-time high. The difference is that those gains came when Tesla’s sales and profits were soaring and the demand outlook for electric vehicles was bright.
But when the 2021 tech mania erupted amid fears about rising inflation and high interest rates, Tesla stock fell sharply. Then came warnings of an unexpected slowdown in electric vehicle sales and shrinking profit margins, and the stock struggled to climb back to those previous highs. It set its first new record since 2021 after Trump’s election.
The options market tells a similar story. Tesla is such a favorite among derivatives traders that over the past month it has been the fifth-largest stock options position in the U.S. by notional volume, according to Rocky Fishman, founder of Asym 500. The top four are the S&P 500 , the SPDR S&P 500 ETF Trust, the Invesco QQQ Trust Series 1 and the Nasdaq 100 Index.
“There is spectacular upside potential,” said Tom Keen, Piper Sandler options trader. “And because having stock options has worked, people continue to do it.”
As long as this pattern holds, Tesla stock can continue to rise. After all, its investors are no strangers to these types of rapid rises. And since Musk has a role in the Trump administration, there’s no telling where the company will end up.
“The problem is that Musk only has a stake in the public market and its symbol is TSLA”said Colas of DataTrek. “That makes it the focus of global investors and valuation is simply not a factor for many of them.”
