Less than two months ago, shares of Tesla were on their way to just the third losing year in the electric vehicle maker’s decade and a half as a public company. But after a furious rally in the last seven weeks, the stock is suddenly among the S&P 500 Index’s best performers for 2024.
What happened to trigger the turnaround? Nothing at the company, where demand for its cars is still wobbly and the future looks increasingly uncertain. Rather it was what investors regard as a political masterstroke by Tesla’s leader, Elon Musk, aggressively supporting President-elect Donald Trump on the campaign trail and taking an unofficial role in his administration.
“How do you put a value on the fact that Musk has deep access with the incoming administration?” said Steve Sosnick, chief strategist at Interactive Brokers. “You can assign almost any number to it.”
Investors seem to be doing just that. Prior to the US presidential election Tesla shares were down 2.3% for the year. Since election day, they’ve soared 73%, putting them up 69% for 2024. Meaning, in less than two months, the EV maker has added a staggering US$572-billion (R10.5-trillion) to its market capitalisation, bringing it to around $1.4-trillion, although nothing about the company fundamentally changed.
Tesla shares slowed their roll last week, losing 3.5% after leaping more than 12% in each of the two prior weeks, as the US Federal Reserve’s hawkish pivot sparked a wider selloff in equities.
Regulations
Despite Trump’s well-known aversion to EVs, investors appear to be betting that Musk’s continued closeness to the administration will ease the way for Tesla’s ambition of building a fully self-driving car. Several Wall Street analysts have dramatically raised their price targets on the stock. They see the Trump White House as a gamechanger for self-driving technology and Tesla’s alignment with the new administration benefiting the company by easing regulations.
But at the same time, the EV maker’s earnings and revenue expectations for 2024, 2025 and 2026 have plunged this year. And it remains unclear when its robotaxi initiative will start making money. That uncertainty about the next few years has some investors concerned that Tesla’s whopping market value is built on a wobbly platform.
Read: Elon Musk’s net worth tops $400-billion
“There are massive hurdles for Tesla shares in 2025,” said Chris Gannatti, global head of research at Wisdomtree. “It is hard to imagine an upside scenario from here.”
Between $500-billion and $600-billion of Tesla’s market cap is based on its EV and energy businesses, according to Evercore ISI analyst Chris McNally, with the rest ascribed to “things to come”, such as self-driving cars and humanoid robots. And calculations by Nicholas Colas, co-founder of DataTrek Research, show that over 90% of Tesla’s share price is tied to what the company might do in the future.
You can see it in the company’s earnings valuations relative to another high-flyer: the artificial intelligence chip giant Nvidia. Until recently, Nvidia was considered the hottest stock in the market. Now it’s Tesla’s turn. But based on their price-to-earnings ratios, these are two very different businesses. Nvidia is currently trading at 32x its projected earnings over the next 12 months, Tesla is at 129x.
That’s a substantial gap, particularly in light of the risks facing Tesla’s near-term performance. The Trump administration wants to cut federal subsidies for EVs, which will make the already expensive vehicles even pricier than petrol-powered cars. About two-thirds of Tesla’s US sales, or 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 more, which could benefit Tesla by further consolidating its market position.
Theories about the parabolic rise of Tesla’s stock price abound on Wall Street. Investors want to bet on Musk’s growing power in Washington; the company’s massive following among retail traders is boosting the move. And Trump’s election win can transform the EV maker and offer massive future benefits.
“People who bet against Musk and Tesla have consistently been proven wrong,” said Cole Wilcox, portfolio manager at Longboard Asset Management. “There is nothing in his way that can prevent him from executing his visions now.” — Esha Dey, (c) 2024 Bloomberg LP
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