Tesla’s Trump Card Is A Key Catalyst In Its Autonomous Future

Summary:

• Tesla, Inc. remains a Buy despite its high valuation due to long-term growth potential, especially with expected regulatory easing under a Republican trifecta accelerating autonomous vehicle approval.
• The impending Trump administration and GOP-controlled Congress are likely to loosen regulations, benefiting Tesla’s autonomous taxi plans (Cybercab), which could become a trillion-dollar opportunity.
• Tesla could reach a $3.5T enterprise value by 2029 with a 28.2% CAGR and 44% margin of safety; conservatively, it offers over 15% CAGR and a 10% margin of safety.

Since my last analysis of Tesla, Inc. (NASDAQ:TSLA), the stock has gained 55% in price. While this is largely due to sentiment factors related to the impending Trump presidency, which is likely to be beneficial to Tesla’s Full Self-Driving regulatory approval, such sentiment simply reflects a fraction of the future growth potential that the general market has not yet fully accounted for in its evaluation of the company. As a result, even though Tesla could be viewed as overvalued based on short-term perspectives, based on the next five to 10 years, I still rate the stock a Buy even at this higher price point.

The implied five-year enterprise value CAGR in a well-executed autonomous taxi pivot and stable macroeconomic environment is 28.2%, with a 44% margin of safety for investment, based on my valuation model. Even in a much more conservative outlook, a five-year enterprise value CAGR of over 15% is likely, with approximately a 10% margin of safety for investment.

Operational Analysis: The Republican Trifecta Is a Victory for Tesla

Reports have indicated that Trump’s transition team would prioritize creating a federal framework for self-driving cars. This is expected to accelerate Tesla’s autonomous vehicle ambitions, particularly with its Cybercab project, which has the potential to be a $1 trillion opportunity over the long term.

The Trump administration is very likely to loosen regulations around autonomous vehicles—this is likely to be a major tailwind for Tesla, which has experienced significant regulatory resistance recently.

In addition, Trump has expressed skepticism about electric vehicles during his campaign, including calling for an end to the $7,500 federal EV tax credit, but this may not significantly hurt Tesla. Compared to General Motors (GM) and Ford (F), Tesla is less reliant on these tax credits due to its profitability and scale in the EV market. In fact, eliminating these subsidies could actually benefit Tesla by reducing competition from smaller EV manufacturers and legacy automakers struggling with EV profitability.

We’re also not just dealing with a Trump presidency; we have a full Republican trifecta, with the Republicans securing control of both the House of Representatives and the Senate. This gives the Grand Old Party significant power to advance its legislative agenda with fewer obstacles from Democrats. Therefore, President-elect Trump will have a smoother path to implementing his policies, and the gates to regulatory approval for Tesla’s autonomous vehicles will be less restricted.

Valuation Analysis: Significantly Undervalued, With a Rare Margin of Safety Dependent on Exceptional Execution

If Tesla achieves strong momentum in the autonomous vehicle market under the impending Trump administration, it does not seem unreasonable to me that the company achieves at least a 20% revenue CAGR over the next five years. Indeed, this is optimistic, but it is still somewhat conservative. In prior analyses, I estimated 22.5%, so I am somewhat more reserved in my bullishness for this thesis to show the risk in the stock’s current valuation for investors.

The company’s trailing 12-month revenues are $97.15 billion. Therefore, if it increases this at a 20% CAGR over the next five years, the company will have total revenues of $241.74 billion. This is highly dependent on regulatory easing and the beginning of successful Cybercab deployment at scale.

With a successful pivot to autonomous taxis as its core operations with a full-scale launch of Optimus in the pipeline, we are likely to see the company’s EBITDA margin expand significantly. To be conservative, I am estimating its EBITDA margin will be 22.5% in 2029, with the possibility of scaling as high as 27.5% from 2029 to 2034. This assumes that by 2029, the company’s predominant form of revenue generation is from autonomous taxi operations. Therefore, my conservative trailing 12-month EBITDA estimate for Tesla in November 2029 is $54.39 billion.

Despite an already incredibly high valuation, the reality of the current market position, the impending Trump presidency, and the long-term growth horizon show that the current valuation multiples will be sustained (and even increase) over the next five years. To be conservative, I will be using the midpoint of the company’s five-year average forward EV-to-EBITDA and five-year average current EV-to-EBITDA ratios as my terminal multiple.

At a terminal EV-to-EBITDA multiple of 64.4, the company’s enterprise value will be $3.5 trillion. This implies a five-year enterprise value CAGR of 28.2% from November 2024, when the enterprise value is $1.01 trillion, to November 2029, when it has a significant likelihood of being $3.5 trillion, based on my analysis.

Tesla’s weighted average cost of capital is 14.15%, with an equity weight of 99.04% and a debt weight of 0.96%, where equity costs 14.25% and debt costs 2.97% (after a tax rate of 0%). Discounting back my estimate of $3.5 trillion for its November 2029 enterprise value to the present day (over five years) discounted rate of 14.15% gives a current implied intrinsic enterprise value of $1.81 trillion. As the company’s current enterprise value is $1.01 trillion, this indicates a margin of safety of 44% for investment in an optimistic long-term outcome.

Risk Analysis: Less Than Perfect Execution Still Leads to an Appealing Five-Year Return

Tesla bears may argue that Tesla’s autonomous vision will not come to fruition. Indeed, for this four-year window with a Republican trifecta to be as accretive as one would hope for Tesla, it not only requires faster regulatory approval for Tesla’s autonomous technology. Also required are genuine, safe, and reliable fully autonomous capabilities to justify its regulatory approval. In my opinion, four years is enough time, given that its Full Self-Driving (“FSD”) technology is already at Level 2 and likely only needs to achieve Level 4 (though ideally 5) for regulatory approval for autonomous taxis.

Investors should be cautious because my above thesis depends heavily on Musk’s direction and a stable macroeconomic and geopolitical environment that does not stifle international growth and trade. If we were to take a much more conservative outlook, with a revenue CAGR of just 17.5% over the next five years, a 20% EBITDA margin, and a terminal EV-to-EBITDA multiple of 50, the company’s November 2029 enterprise value would be $2.18 trillion. This is given starting November 2024 trailing 12-month revenues of $97.15 billion. As the company’s present enterprise value is $1.01 trillion, this indicates a 16.63% five-year enterprise value CAGR and a 10% margin of safety for investment in a highly conservative base case when discounting my November 2029 enterprise value back with a discounted rate of 14.15%.

One can speculate a worst-case scenario where the thesis becomes defunct, but these outcomes seem highly unlikely to me. Yet, they include, but are not limited to, Elon Musk not being available for duty; geopolitical escalation affecting global supply chains and macroeconomic growth (though this would likely lead to a global depression in the worst-case scenario of a world war); or severe technological errors in Tesla’s autonomous taxi products, which could tarnish its reputation and growth potential. However, given the company’s history of robust growth and resilience, as well as proactive efforts by the Republicans to engender strong international peace and order, these worst-case risk outcomes all reside at the low-probability end of the curve.

Conclusion: Buy

For a successful investment in Tesla stock, one needs to believe in the execution ability and strategic direction laid out by Elon Musk. Indeed, it is not without risks, which are amplified due to the company’s very high valuation multiples, opening up the potential for significant volatility. This is primarily why my rating remains a Buy and not a Strong Buy. However, at a weight of 7.5% of portfolios, Tesla could be a very lucrative long-term investment. The Republican trifecta is a big win for Tesla, and I’m bullish on a $3.5 trillion enterprise value for the company by November 2029.

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Analyst’s Disclosure: I/we have a beneficial long 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.

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