(Bloomberg) -- Less than two months ago, shares of Tesla Inc. 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 $572 billion to its market capitalization, bringing it to around $1.4 trillion, although nothing about the company fundamentally changed.
Tesla shares slowed their roll this week, losing 3.5% after leaping more than 12% in each of the two prior weeks, as the Federal Reserve’s hawkish pivot sparked a wider selloff in equities. Saturday marks the four-year anniversary of the stock joining the S&P 500.
The company did not respond to a request for comment.
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 game changer for self-driving technology and Tesla’s alignment with the new administration benefiting the company by easing regulations.
Wobbly Platform
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.
“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 Corp. 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 32 times its projected earnings over the next 12 months, Tesla is at 129 times.
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 gas-powered cars. About two-third 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.
Betting on easing regulations is dicey, however, because it can take a while to get done. And even if it happens, there’s little indication that Tesla’s Cybercab is ready to hit the road. If anything, loosening the rules before Tesla’s technology gets where it needs to be risks benefiting Tesla’s chief robotaxi competitor, Alphabet Inc.’s Waymo.
“It is not regulation that is holding Tesla back when it comes to self-driving,” said Thomas Thornton, founder of Hedge Fund Telemetry.
Betting on Power
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.”
In many ways, Tesla and Bitcoin have become the face of the post-election rally sparked by the return of animal spirits in markets.
“This rally is reminiscent of the moves we saw in 2020 and 2021, only this time the Tesla story has many more intangibles,” Interactive Brokers’ Sosnick said. The stock gained more than 740% in 2020, and then rose another 74% through Nov. 4, 2021 to set a new all-time high. The difference is those gains came as Tesla’s sales and profits were soaring, and the outlook for EV demand was bright.
But as the tech-mania of 2021 snapped amid fears about rising inflation and steep interest rates, Tesla shares retreated sharply. Then came the warnings of an unexpected slowdown in EV sales, and thinning profit margins, and the stock struggled to climb back to those prior highs. It set its first new record since 2021 after Trump was elected.
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 equity options position in the US 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 a dramatic reach for upside,” said Tom Keen, options trader at Piper Sandler. “And since owning call options on the stock has been working, people just keep doing that.”
As long as this kind of pattern holds, Tesla shares can keep rising. After all, its investors are no strangers to such rapid rallies. And with Musk having a role in the Trump administration, there’s no telling where the company ultimately ends up.
“The problem is that there’s only one public market play on Musk, and its symbol is TSLA,” DataTrek’s Colas said. “That makes it the focus of global investors, and valuation simply is not a consideration for many of them.”
