It's been a rough start to 2025 for megacap technology stocks. As of market close on April 24, each member of the "Magnificent Seven" has generated a negative return so far this year.
Among this list of artificial intelligence (AI) darlings, none has fared worse than electric vehicle (EV) manufacturer Tesla(NASDAQ: TSLA). As I write this, shares of Tesla have dropped by an abysmal 36% on the year.
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One of the biggest factors driving the sell-off in Tesla stock is perceived damage to the company's brand. Let's explore why investors have been concerned about the brand of late, and more importantly assess why these fears may be overblown.
The Tesla brand is under some intense scrutiny right now, but...
Brand equity is one of the most valuable assets a company can have. There are very few businesses in the world that can command immediate recognition of their products. Apple, Coca-Cola, McDonald's, and Nike are in rare company when it comes to building a brand moat.
I'm not sure I would place Tesla at the top of most-recognized brands in the automobile industry. However, in the EV subsector of the broader industry, I think it takes the throne (or close to it).
For most companies, achieving a level of global scale and brand recognition would require billions of dollars for sales and marketing. While Tesla does invest in advertising to some degree, the company has one thing no other automobile business can claim: an outspoken CEO named Elon Musk.
As I wrote a year ago, Musk more or less serves as his company's primary marketing tool. Thanks to social media, he has an enormous reach around the world and can market the latest and greatest at his company with the touch of a button. The thing is, his influence can be both an asset and a liability. Let's explore what I mean by that.
During the final phases of the 2024 presidential election, he emerged as a significant financial supporter of GOP nominee Donald Trump. Following his victory on Nov. 5, 2024, Trump ended up appointing Musk to lead a new program called the Department of Government Efficiency (DOGE).
The primary goal of DOGE is to identify areas of wasteful spending in the federal budget in an effort to reduce the U.S. deficit. At a high level, a lot of people may not see such a problem with that goal.
However, as is often the case with Musk, he has made DOGE into a major publicity campaign. Nearly every day, it posts on social media what contracts it has canceled, why it canceled them, and how much money those deals were worth.
These actions have caused a stir with some political activists, leading to a chain reaction in the form of protests at many of Tesla's dealerships. As Musk said during the first-quarter call recently, "The natural blowback from that is those who were receiving the wasteful dollars and the unfortunate dollars will try to attack me and the DOGE team and anything associated with me."
The fission that has resulted from Musk's political ties has some investors worried that consumers may buy alternative EVs and pass on a Tesla for fear of being falsely labeled a supporter of Musk or any number of polarizing political figures.
As a result, the company's growth prospects have really started to come into question.
Image Source: Tesla
... it may not be as damaged as you think
Considering Trump will be in the Oval Office for another three-and-a-half years, a bearish investor might think Tesla's best days are in the rearview mirror and the company won't be able to recover anytime soon. Luckily, during its first-quarter earnings call, management dropped a breadcrumb that has me (a longtime Tesla investor) slightly more optimistic.
During the call, one executive said that the company witnessed "a record number of test drives globally in Q1 as well. So interest remains high. And so right now, we continue to see good interest still." Musk followed this comment up by saying, "as far as absent macro issues, we don't see any reduction in demand."
The three words that personally put me at ease are "interest remains high."
Should you buy Tesla stock right now?
During the call, Musk alluded to the fact that he is going to scale back on his time at DOGE. I think this will be a benefit in the near term, but at a higher level, such a move may not even be necessary. I am cautiously optimistic that the company's long-term growth remains intact given management's assurance that demand levels remain robust.
When you layer on top of strong EV demand the fact that Tesla has a number of AI-powered products and services that should scale up over the next couple of years, the stock still appears to be a solid opportunity for those who can handle some volatility and uncertainty here and there.
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Adam Spatacco has positions in Apple and Tesla. The Motley Fool has positions in and recommends Apple, Nike, and Tesla. The Motley Fool has a disclosure policy.
