Will Tesla be increased or completed?

It’s no secret that Donald Trump admires Tesla CEO Elon Musk – and, perhaps more importantly, values ​​the votes Musk could receive from his passionate fan base. Musk, in turn, has echoed this sentiment and appears to have significant influence over the presidential candidate. That being said, the Biden administration’s policies for Tesla have been pretty good. The automaker has benefited from significant incentives for electric vehicles (EVs), including the $7,500 tax credit for US-made EVs and the removal of the 200,000 vehicle registration cap, a provision that had previously hurt Tesla. Republicans, on the other hand, generally oppose government subsidies for electric vehicles and renewable energy, preferring a free market approach. Trump has also taken an aggressive stance, suggesting that if elected he would end the federal electric vehicle mandate on day one. But despite the potential continuity of regulatory action under Democrats, Tesla’s CEO thinks the company could do better under Trump. Surprising? Not really.

Can Tesla be successful without subsidies?

We believe that Tesla is well-positioned not only to survive but also to thrive in a subsidy-free, market-based system as it is one of the lowest cost electric vehicle manufacturers. The company has always demonstrated discipline in managing its fixed costs, including research and development and SG&A expenses, which has enabled it to remain profitable even in difficult market conditions. Tesla has vertically integrated its operations – it controls much of its supply chain, from battery production to software development, and has significantly automated its manufacturing process. Tesla’s so-called Gigafactories also play a large role in the company’s cost structure by increasing economies of scale in battery production. Tesla also rarely spends money on flashy advertising. All of these factors have contributed to low costs and higher margins. Last quarter, Tesla delivered an adjusted profit margin of 7% despite industry headwinds and declining volumes. The company posted an impressive 17% margin in fiscal 2022, when the electric vehicle market was significantly cheaper.

As government subsidies are reduced or more likely eliminated under Trump, Tesla’s lower cost base becomes a key advantage. In a market where electric vehicle manufacturers can no longer rely on subsidies to offset inefficiencies, Tesla’s superior operating efficiency will potentially allow it to outlast its less efficient competitors. Rivian, for example – one of Tesla’s main competitors despite having a very compelling vehicle offering – has lost around $1.4 billion per quarter over the last two quarters. Without the support of government incentives, companies like Rivian could face a much more uncertain future. And it’s not just Rivian. Other automakers, including U.S. giants like GM and Ford, could also struggle in a subsidy-free landscape. Neither has yet achieved the scale or cost efficiency required to make electric vehicle operations profitable. GM, for example, sold only 22,000 electric vehicles out of a total of around 696,000 vehicles in the second quarter of 2024. This limited volume makes it difficult to achieve the same economies of scale as Tesla. Foreign automakers from Korea and Japan, which had planned to invest billions in the U.S. to take advantage of the $7,500 EV credit, may also reconsider their expansion in the U.S. market.

The performance of TSLA stock relative to the index has been quite volatile over the past three years. The stock’s returns were 50% in 2021, -65% in 2022, and 102% in 2023. In contrast, the Trefis High Quality Portfolio is significantly less volatile with a collection of 30 stocks. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. Less of a roller coaster ride, as the HQ portfolio performance metrics show. Despite the wild stock swings, Tesla will thrive even in a less favorable regulatory environment.

Trade barriers may give Tesla an edge over Chinese electric vehicles

In addition, Trump’s trade policies could strengthen Tesla’s position against its Chinese competitors. While the US has already imposed a 100 percent tariff on Chinese electric vehicles, Trump has suggested the possibility of a 200 percent tariff on Chinese electric vehicles built in Mexico and imported into the US. This would create significant headwinds for Chinese automakers trying to break into the U.S. market. Although Trump has invited Chinese automakers to build factories in the US, they are unlikely to make such a move given their significant capacity investments in China and the unpredictable regulatory environment. Most Chinese EV suppliers – with the exception of BYD and Li Auto – continue to make losses and it is not clear whether their manufacturing operations would be profitable anywhere else in the world without government support and higher labor costs. Even BYD, now the world’s largest electric vehicle maker, posted net margins of under 5% last quarter, despite robust demand and support in China. This is below Tesla’s margins. As tariffs and trade barriers increase, Tesla’s focus on domestic production and its cost efficiency could give the company a significant advantage over its domestic and foreign competitors.

Tesla’s energy business should hold up

Trump has been a proponent of increasing fossil fuel production and cutting renewable energy subsidies. However, Tesla’s battery business is well positioned to thrive regardless. The renewable energy market is expected to grow due to increasing cost competitiveness and global environmental concerns, making government policy less of a determining factor. According to the IEA, global renewable energy capacity could increase to 2.5 times its current level by 2030 and renewable energy is expected to be the largest source of global electricity generation by 2025, meaning the need for energy storage will only increase. Storage solutions respond to the fluctuations in renewable energy by storing excess energy and releasing it when demand increases. Tesla’s energy division is expanding rapidly, driven by its battery technologies. Last quarter, the company deployed a record 9.4 gigawatt hours (GWh) of storage solutions, driven by demand for its Megapack and Powerwall products. Tesla has a competitive advantage in energy density, cost and software integration for its batteries, and its significant investments in production capacity strengthen its position. Even without government support, Tesla’s energy business should be able to benefit from the growing renewable energy market. A closer look at Tesla’s rapidly growing clean energy business.

As investors keep their fingers crossed for a soft landing for the U.S. economy following interest rate cuts, the question is how bad things can get if another recession occurs. Our How Low Stocks Can Fall in a Market Crash dashboard tracks how key stocks have performed during and after the last six years Market crashes.

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