Musk’s Trump Trade Makes Tesla a Winner With $570 Billion Rally

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(Bloomberg) — Less than two months ago, shares of Tesla Inc. It’s on track for only its third year of loss in a decade and a half for the electric automaker as a public company. But after a violent rally in the past seven weeks, the stock is suddenly among the best-performing stocks on the S&P 500 for 2024.

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What happened to catalyze the transformation? Nothing at the company, as demand for its cars remains volatile and the future looks increasingly uncertain. Rather, it was what investors saw as a political hit by Tesla leader Elon Musk, as he strongly supported President-elect Donald Trump in the election campaign and played an unofficial role in his administration.

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“How do you evaluate the fact that Musk has deep access to the incoming administration?” said Steve Sosnick, chief strategist at Interactive Brokers. “You can assign almost any number to it.”

And investors seem to be doing just that. Before the US presidential election, Tesla shares were down 2.3% for the year. Since Election Day, they’re up 73%, putting them up 69% for 2024. That means, in less than two months, the electric car maker has added a staggering $572 billion to its market cap, bringing it to about $1.4 trillion, despite… That nothing about the company changed radically.

Tesla shares slowed in trading this week, losing 3.5% after jumping more than 12% in each of the previous two weeks, as the Federal Reserve’s hawkish pivot sparked a broad sell-off in stocks. 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 known aversion to electric cars, investors appear to be betting that Musk’s continued proximity to the administration will ease the way for Tesla’s ambition to build a fully self-driving car. Several Wall Street analysts have significantly raised their price targets for the stock. They argue that a Trump White House will be a game-changer for self-driving technology, and Tesla’s alignment with the new administration benefits the company by easing regulations.

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Oscillating platform

But at the same time, the electric car maker’s profit and revenue forecasts for 2024, 2025 and 2026 fell this year. It is still unclear when the robotaxi initiative will start making money. The uncertainty of the next few years has some investors concerned that Tesla’s massive market value is built on a wobbly platform.

“There are huge hurdles for Tesla shares in 2025,” said Chris Ganaty, head of global research at Wisdomtree. “It is difficult to imagine a bullish scenario from here.”

Between $500 billion and $600 billion of Tesla’s market value is based on its electric vehicle and energy businesses, according to Evercore ISI analyst Chris McNally, while the rest is attributed to “things to come,” such as self-driving cars and humanoid robots. Calculations by Nicholas Colas, co-founder of DataTrek Research, show that more than 90% of Tesla’s stock price is tied to what the company might do in the future.

You can see that in the company’s earnings valuations compared to another high-profile company: AI chip giant Nvidia Corp. Until recently, Nvidia was considered the hottest stock on the market. Now it’s Tesla’s turn. But based on their price-to-earnings ratios, these two companies are very different. Nvidia currently trades at 32 times its expected earnings over the next 12 months, and Tesla trades at 129 times.

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This is a large gap, especially given the risks facing Tesla’s performance in the near term. The Trump administration wants to cut federal subsidies for electric vehicles, which would make already expensive vehicles more expensive than gas-powered cars. About two-thirds of Tesla’s U.S. 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 local rivals more, which could benefit Tesla by strengthening its position in the market.

However, betting on regulatory easing is risky, as it may take some time to accomplish. Even if that happens, there’s no indication that the Tesla Cybercab is ready to hit the road. If anything, relaxing the rules before Tesla’s technology gets where it needs to is a risk in favor of the Tesla robotaxi’s main competitor, Alphabet Inc.’s Waymo.

“It’s not regulations that are holding Tesla back when it comes to self-driving,” said Thomas Thornton, founder of Hedge Fund Telemetry.

Bet on power

Theories abound about the equivalent rise in Tesla’s stock price on Wall Street. Investors want to bet on Musk’s growing power in Washington; The company’s huge following among retailers is fueling the move. A Trump election victory could transform the electric car maker and provide huge future benefits.

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“People who bet against Musk and Tesla have been consistently proven wrong,” said Cole Wilcox, portfolio manager at Longboard Asset Management. “There is nothing in his way that can stop him from carrying out his vision now.”

In many ways, Tesla and Bitcoin have become the faces of the post-election protest sparked by the return of animal spirits to markets.

“This rally is reminiscent of the moves we saw in 2020 and 2021, only this time the Tesla story contains many intangibles,” Interactive Brokers’ Sosnick said. The stock gained more than 740% in 2020, then rose another 74% through November 4, 2021 to hit a new all-time high. The difference is that those gains came as Tesla’s sales and profits rose, and the outlook for demand for electric cars was bright.

But as 2021’s tech mania ended amid concerns about rising inflation and steep interest rates, Tesla shares fell sharply. Then came warnings of an unexpected slowdown in electric vehicle sales, dwindling profit margins, and the stock struggled to return to those previous highs. It set its first new record since 2021 after Trump’s election.

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The options market tells a similar story. Tesla is a favorite among derivatives traders, and over the past month has been the fifth-largest U.S. equity options position by notional volume, according to Rocky Fishman, founder of Asym 500. The top four are the S&P 500, SPDR S&P 500 ETF Trust , Invesco QQQ Trust Series 1 and the Nasdaq 100 Index.

“There’s a big trend to the upside,” said Tom Kane, options trader at Piper Sandler. “Since owning call options on stocks has been successful, people continue to do it.”

As long as this type of pattern continues, Tesla shares could continue to rise. After all, its investors are no strangers to such rapid rises. And with Musk having a role in the Trump administration, there’s no telling where the company will ultimately end up.

“The problem is that there is only one public market that relates to Musk, and its ticker symbol is TSLA,” DataTrek’s Colas said. “This makes it the focus of global investors, and valuation is simply not a consideration for many of them.”

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