Tesla's Trump-Era Surge: Overhyped Policy Optimism and Overvaluation Risks

• Stock Surge: Tesla's stock has risen by 69% since the U.S. presidential election, adding over $556 billion to its market cap.

• Key Drivers: The surge is driven by strong Q3 earnings, policy optimism (e.g., eased AV regulations, potential EV tax credit removal), and tariff advantages favoring domestic production.

• Q3 Performance: Revenue increased by 8% year-over-year to $25.2 billion, with EPS rising 9% year-over-year to $0.72. Free cash flow reached a multi-year high of $2.7 billion.

• Policy Benefits: AV regulation easing under the Trump administration provides opportunities for Tesla's Full-Self Driving (FSD) technology, but Waymo's superior AV systems pose competitive challenges.

• Tax Credit Impact: Tesla is less reliant on EV tax credits than competitors (e.g., GM, Rivian) and could thrive without them, although ICE vehicles might gain market share.

• Tariff Advantage: Tesla's U.S.-based production shields it from potential tariffs, unlike competitors relying on Mexican manufacturing.

• Valuation Concerns: Tesla's forward P/E ratio of 156.83 raises overvaluation concerns, despite strong momentum. 

Tesla is an American multinational automotive and clean energy company. Recently, the outlooks for this stock have been looking great as their shares have now risen by 69% since the US presidential election on Nov. 5, adding over $556 billion to the company’s market capitalization. Due to Elon Musk’s closeness to the president and the Trump team’s plan to ease US rules for self-driving vehicles, including the removal of the EV tax credit, the surge in Tesla stock can be attributed to these developments. Q3 earnings reports are also excellent , as they show a 7.2% year-over-year increase. However, a Bernstein analyst has assigned a sell rating on Tesla, citing risks in the Robotaxi project and overvaluation.

Recently, Tesla’s stock has experienced a remarkable surge, rallying by 60% over the past couple of months. This sharp rise reflects heightened investor confidence, powered by President Donald Trump’s potential policy shift and the optimism surrounding the company’s third-quarter profits. As Tesla continues to seize market attention, questions are arising about the sustainability of its valuation and how political and economic changes could honestly and imminently impact its trajectory. The key purpose of this article is to explore and analyze Tesla’s present valuation based on recent performance, offer educated investment advice, and identify potential positive outcomes the company might derive from possible policy changes. By further examining these areas, our goal is to present an all-inclusive perspective on Tesla’s position in the market and its outlook for the future.

During Q3, Tesla ended with a revenue of $25.2 billion, up 8 percent from 2023. Tesla is starting to buy raw materials at a low cost and is improving manufacturing efficiency to meet the demand for supply. High demand for many Tesla cars, including the Cybertruck, indicates consistent revenue growth as Tesla continually receives car orders. Tesla's earnings per share are $0.72, up 9 percent from last year and 38 percent from last quarter. Additionally, the gross margin stands at 19.8%, an increase of 190 basis points (bps) from last year and 180 bps from last quarter. Furthermore, the free cash flow is $2.7 billion, marking a multi-year high.

Investor optimism surged after Donald Trump's election win, driven by expectations of pro-business policies such as deregulation, tax reforms, and economic growth. Tesla benefited from this enthusiasm partly due to Elon Musk's perceived relationship with the administration. Although Elon Musk did not overtly campaign for Trump, he cultivated ties with the administration after the election, including serving on advisory councils. His presence in Trump’s Strategic and Policy Forum showed his willingness to engage with the government, creating the perception that Tesla might gain from policies under the Trump presidency.

Investors speculated that Tesla could benefit from regulatory shifts and policies favorable to technological innovation, even in sectors like renewable energy, which Trump traditionally didn't value. Optimism also stemmed from broader economic growth expectations that could spur demand for Tesla’s vehicles and infrastructure projects​. Much of the optimism was speculative and could be overstated. Musk’s engagement raised hopes of policy shifts that would benefit Tesla, but Trump’s broader agenda, such as support for traditional fossil fuels, aligns less with Tesla’s mission. Furthermore, investors' assumptions about direct regulatory benefits to Tesla ignored potential market challenges, including increased competition and the inherent risks of overvaluing a stock based on political expectations.

The removal of the EV tax credit would have the most unfavorable effect on companies like GM, Ford, and Rivian, as Tesla is better positioned to absorb the loss due to its dominance in profits, economies of scale, and brand loyalty. Thanks to its cost-effective pricing structure for mass products such as the Model 3 and Model Y, combined with its backward and forward integration, Tesla will still appeal to consumers without the credit. In comparison, its competitors are more dependent on the tax credit for their EVs to be competitive, and Rivian is worst off due to its weak and expensive business model. The absence of the credit may increase the market share of internal combustion engine (ICE) vehicles, as they remain more affordable for the mass market, potentially delaying EV penetration. However, this approach is risky, as a future administration might restore the credit, allowing competitors to lower prices and regain market share. Tesla, accustomed to operating without state assistance, may struggle to retain its market share under such conditions. The tax credit’s repeal could fundamentally disrupt the EV market’s growth and set back broader decarbonization objectives.

The easing of autonomous vehicle (AV) regulations at the federal level, driven by initiatives under the Trump administration, has created new opportunities for AV testing and deployment by reducing red tape and encouraging innovation. For Tesla, this regulatory shift allows broader real-world testing of its Full-Self Driving (FSD) software and positions the company to advance its AV capabilities. However, Tesla faces significant challenges as its FSD software lags behind Waymo’s more mature and proven technology. Waymo, with its extensive testing data, superior sensor systems, and established partnerships, is better positioned to capitalize on regulatory easing and solidify its leadership in the AV market, posing a competitive challenge for Tesla as it works to close the technological gap.

Tesla could have a notable advantage over competitors if tariffs were imposed on foreign imports. Tesla’s reliance on domestic production facilities in Fremont, California, and Austin, Texas, allows it to bypass potential tariffs, unlike competitors such as GM, Stellantis, and Nissan, which depend heavily on Mexican manufacturing and could face higher costs. As of now, Tesla’s competitors are benefiting from favorable trade agreements between the U.S. and Mexico and significantly lower labor costs in Mexico. However, if tariffs were implemented, their manufacturing costs would rise, further reducing profitability. This all depends on whether the tariffs are substantial and sustained. Ultimately, while Tesla’s domestic production positions it favorably in the face of tariffs, the extent of its advantage depends on the scope and duration of the tariffs.

Tesla’s market cap has shot up by $415 billion, but that growth doesn’t match up with its actual financial performance. With a sky-high forward P/E ratio of 156.83 and revenue growth of just 1.28% year-over-year, it’s hard to justify such an inflated valuation. Compared to established automakers like Toyota and GM, which are more profitable and growing steadily but trade at much lower multiples, Tesla’s valuation feels more like extreme optimism than a reflection of reality.

Given Tesla's recent surge, investors may want to reduce their positions, as the stock appears overvalued relative to traditional valuation metrics. While Tesla remains a leader in innovation, its price rise may not be sustainable in the long term. One alternative strategy is selling covered calls, which allows investors to generate income through premiums while maintaining some exposure to the stock's upside potential. However, shorting Tesla should be approached with caution. Despite its overvaluation, the company's strong momentum and market position make it a risky bet to short, as it has repeatedly defied bearish expectations. Shorting could lead to significant losses if the stock continues its upward trend, so investors should carefully consider the risks before pursuing this strategy.

Tesla’s recent gross profit margin shows improvement due to the reduction of their costs of goods sold. Despite this, its current margin is severely lower than its historic values. As of Q3, the gross profit margin was 19.84%, but in 2022’s Q2, it was 29.11%. Its efficiency with its costs has been declining for years. Additionally, its current P/E ratio of 112.45% reflects a significant drop from its historic average of 232.34%. Over the past year, TSLA’s stock value has risen by 77.75%, significantly outperforming competitors like Ford and General Motors, whose stocks have increased by less than 20% during the same period. Since the election, TSLA has seen dynamic growth of 24.83%, while its competitors’ values have declined.

The removal of the EV tax credit favors Tesla because it is less reliant on this incentive than its competitors: GM, Ford, and Rivian. Without the $7,500 credit, these companies may struggle to keep prices competitive, while Tesla will continue to thrive. This shift could also slow down EV adoption, allowing internal combustion engines (ICE) to regain market share due to lower relative costs. However, if a future administration reinstates the credit, Tesla’s advantage could be short-lived. Although the easing of autonomous vehicle (AV) regulations under the Trump administration favors Tesla, it also favors competitors like Waymo. Furthermore, Waymo will receive greater benefits due to its advanced Level 4 Full-Self Driving (FSD) technology, compared to Tesla’s Level 2 FSD technology. Lastly, tariffs on foreign imports give Tesla an edge due to its established domestic production system, while competitors GM, Ford, and Rivian, who rely on Mexican manufacturing, will face higher costs. However, this advantage is heavily dependent on the extent and sustainability of tariffs.

TLDR: Tesla’s stock surged 60% after strong Q3 results and Trump’s election victory, adding $415 billion to its market cap. Key drivers include policy optimism surrounding EV tax credit removal, eased AV regulations, and potential tariff advantages favoring Tesla’s domestic production. Despite these benefits, Tesla’s valuation—highlighted by a forward P/E ratio of 156.83—significantly exceeds its financial performance. Analysts recommend reducing positions due to overvaluation concerns while cautioning against shorting the stock, given its momentum and appeal.