Tesla’s Upcoming Government Double-Whammy
Contributor since 2015 / 35105 Followers
Summary:
- Tesla is overvalued due to the potential loss of EV tax credits and carbon tax revenue under the Trump administration, impacting margins and growth.
- Increased competition from Rivian and Chinese EV companies, along with the redirection of AI resources to xAI, threatens Tesla’s market position.
- Tesla’s valuation hinges on autonomy growth, but resource diversion to xAI and missed autonomy targets undermine this potential.
- Despite CEO Elon Musk’s political influence, Tesla faces significant risks from subsidy losses and international competition, making it a poor investment.
Justin Paget
Tesla, Inc. (NASDAQ:TSLA) is a company that, we believe, is heavily overvalued, as discussed in our large article, where we shared how the company’s share price run-up doesn’t change the core concerns. As we’ll see throughout this article, the threat of a changing government, through no EV tax credits and carbon tax credit decline, despite Elon Musk’s powerful new position, will hurt future returns substantially.
California EV Tax Credits
With the incoming Trump administration expected to end the $7500 EV tax credit, Tesla, which counts California as one of its largest markets, will see increased pricing struggles. California may look to establish its own EV credit program.
However, California has indicated that Tesla would be excluded from this. This means that not only is the company losing pricing power versus non-EVs, but its EVs are also pricier than competing EVs. That could hurt Tesla’s margins and ability to grow.
Carbon Tax Revenue
Tesla’s largest source of profit is effectively the regulatory credits it sells as a result of being a pure EV company.
Donald Trump, supported by the Senate and the Congress, is expected to push back dramatically on climate change measures. Trump’s administration weakened auto emission standards during his first term, and we expect those measures to continue as a part of a broader anti-climate change push expected from the new administration.
That would reduce the value of the carbon credits that drove more than 30% of Tesla’s profits in the recent quarter. Combined with longer-term efforts by automakers to clean up their fleets, we expect Tesla’s carbon credit revenue and therefore its profits to decline substantially from these new measures.
Rivian Government Support
On top of all this, the Biden administration is looking to close out support for Tesla’s competitors before leaving office. Rivian (RIVN) has received a conditional almost $7 billion loan from the Department of Energy, to resume construction of its Georgia plant.
The company is one of Tesla’s largest pure EV competitors, with 50K US vehicles sold in 2024 versus 500K US sales for Tesla. While it’s much smaller, the loan could enable it to ramp up production and become more competitive, which could either impact Tesla’s margins or hurt its ability to continue its growth.
Tesla China Competition
Tesla is facing substantial competition in China. The company that has global ambitions of long-term growth in vehicle sales at the mid-double-digits saw sales decline YoY in China.
The largest Chinese EV companies are now starting to earn more revenue than Tesla itself, while continuing their rapid growth. In Europe, where the company also doesn’t have the advantage of being a “homegrown” domestic carmaker where it faces the same restrictions as Chinese EVs will the company has also struggled versus domestic companies.
While the incoming data is that Trump will protect U.S. EVs from China, Tesla most certainly can’t justify its valuation with the U.S. alone. Especially with rollbacks in U.S. EV regulations as discussed above.
xAI > Tesla
Moreover, at a $1.08 trillion market capitalization, it’s clear that Tesla needs growth to justify its valuation. Tesla is worth more than most car companies combined despite selling a fraction of vehicles globally.
Major Tesla investors and CEO Elon Musk have both argued that this growth will come from artificial intelligence.
(Cathie) Wood, known for her optimistic tech forecasts and her company’s flagship ARK Innovation ETF (ARKK), sees a “winner-takes-most” scenario unfolding in the autonomous driving space. Wood in an interview with Yahoo Finance predicts this could translate into a staggering “trillion-dollar-plus revenue opportunity for Tesla in the next five years.”
Even Elon Musk has stated that investors should believe in the autonomy thesis.
He then pivoted, saying, “Really, we should be thought of as an AI robotics company. If you value Tesla as just an auto company, you just have to fundamentally, that’s just the wrong framework. If you ask the wrong question, then the right answer is impossible. If somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company.”
Yet, Elon Musk owns 13% of Tesla, versus an estimated 54% of xAI, his artificial intelligence startup recently valued at $50 billion. That clear difference in ownership explains why Elon Musk has redirected both Nvidia GPUs and employees from Tesla to xAI. This is despite no formal revenue sharing agreement etc. existing between the two. So to be clear:
- Elon Musk owns substantially more of xAI than Tesla, meaning he directly benefits financially more from xAI’s success.
- Elon Musk has stated that Tesla’s valuation is based on the company’s ability to solve autonomy, going as far to state that Robotaxis do not need LiDar.
- Elon Musk is redirecting the resources crucial to solving autonomy from Tesla to xAI.
It’s no wonder that as a result, Tesla/Elon Musk is now facing a shareholder lawsuit. How that pans out remains to be seen, however, our takeaway is it should be fairly obvious to investors that Elon Musk cares less about Tesla’s AI success than he does for xAI. Elon Musk himself has stated he wants a larger ownership stake in Tesla to be comfortable focusing on AI with it.
Thesis Risk
The largest risk to our thesis is Elon Musk’s powerful new government position. He has already come out against the Rivian loan, for example, and it’s clear he has the ear of Donald Trump. Should Tesla struggle too much, we can see Elon Musk using his newfound power to attempt to support the company and its growth.
Our View
Putting this all together, there are plenty of storm clouds in the forecast. We highlight some key risks.
1. Recession forecasts are increasing for 2025, especially with the chance of a trade war from the new Trump tariffs. Vehicle sales are a notoriously cyclical industry.
2. Tesla makes substantial profits from carbon tax credits and vehicle prices are supported by $7500 EV tax credits. The loss of both of those could put substantial pressure on the company’s growth and returns.
3. Tesla’s valuation is tied to the growth of autonomy and artificial intelligence. However, the company is redirecting crucial AI resources to xAI, where CEO Elon Musk has an ownership stake that makes xAI more interesting to himself.
4. Internationally, Tesla is facing increased competition from China, with declining sales in China itself. Tesla doesn’t have the “domestic” advantage in these countries.
Putting these risks together with a triple-digit P/E ratio that Tesla currently trades at, with the highest valuation in its peer group, and it’s clear in our view that Tesla is dramatically overvalued.
Conclusion
Realistically, it’s tough to quantify Tesla’s fair value. The company has consistently missed autonomy estimates, and the redirection of resources to xAI won’t help there. Waymo is already earning revenue from a full self-driving platform in multiple major cities. The company is facing competition internationally and a loss of subsidies domestically.
Putting this all together, and we simply view Tesla as multiple times fair value. Despite Elon Musk’s position in the new government pushing up share prices, recent news of increased loss of subsidies makes Tesla a poor investment in our view. Let us know your thoughts in the comments below.
Analyst’s Disclosure: I/we have a beneficial short position in the shares of TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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