Tesla (NASDAQ: TSLA) has been one of the biggest surprises of 2024.
The stock lagged the market for much of the year as the company reported disappointing quarterly results, including sluggish growth and a drop in profits. In addition, EV sales growth has slowed as momentum in the sector appears to be stabilizing now that early adopters have already bought an EV, and EV stocks have generally struggled this year.
Through October 23, the stock was down 14% year to date, underperforming the S&P 500who had won 21%, by a considerable margin, as the chart below shows.
However, since then, the stock has been on fire. The company first impressed investors with its third-quarter earnings report, which showed strong profit growth, and CEO Elon Musk predicted that vehicle production would increase by 20% to 30% in 2025, a significant improvement from flat growth in 2024 .
Then, Tesla surged following the election as Musk's big bet on Trump appeared to pay off. Investors appear to be hopeful that the Trump administration will make it easier for Tesla to introduce its new Cybercab, also known as a robotaxis. Tesla also plans to launch the Model Q at an affordable price of less than $30,000 in the first half of 2025. As you can see from the chart below, through December 17, the stock has increased a whopping 125% in less than two months.
As you can see, Tesla is bringing a lot of momentum into the new year. So, will the stock continue to gain, or is it likely to be pulled back? Here are a few things to watch.
Image source: Tesla.
Tesla stock was already expensive before its recent rally, but its valuation now appears to be completely divorced from the underlying business. The stock trades at a price-to-earnings ratio of 200, which is much more expensive than any of its “Magnificent Seven” peers, none of which trade at a P/E above 51.
At that price, it will be difficult for Tesla to live up to expectations as a mere automaker, as the company already sells nearly 2 million vehicles a year. Those lofty expectations appeared to be based on Musk's own predictions for the company's autonomous vehicle business, as he said Tesla would be the most valuable company in the world if its robotaxi market took off. Given that the Cybercab has yet to go into production and there are regulatory hurdles for the company to overcome, it's certainly not guaranteed that its driverless cars will take off. Uber as Musk has predicted.
Tesla stock has nearly doubled since the election, and Musk's combined relationship with Trump is one of the main reasons why. Musk spent hundreds of millions of dollars on Trump's campaign and appeared on stage with him several times. He has also been tapped to run the new Department of Government Efficiency, which is responsible for curbing government waste.
However, Musk and Trump are unlikely bedfellows in some ways. First, Trump is known to support fossil fuels over green energy, and his administration has already indicated that it will eliminate the $7,500 EV tax credit. Musk has downplayed the impact of such a move, saying it is far worse for EV startups than it is for Tesla, but it is likely to shift some demand for EVs back to traditional combustion vehicles for consumers who sensitive to price, which would be negative. for Tesla.
The real opportunity for the EV maker is in autonomy, and the Trump administration has also indicated that it would ease rules around self-driving cars and establish a national standard, making it easier for Tesla to introduce the Cybercab , which has no rudder.
However, safety will be the ultimate test of any autonomous vehicle, and if the cars are allowed on the road before they are ready, it could spell disaster for Tesla and the Trump administration.
Tesla is one of the most unpredictable companies, and its stock is extremely volatile.
However, it enters the new year effectively priced for perfection at the current valuation. Autonomy is unlikely to have an impact as the company does not plan to produce the Cybercab in 2026, although signs of progress could boost the stock.
Instead, investors' attention will be on the core business, the Model Q vehicle, and whether the Trump administration will be able to help the company in a meaningful way.
With Tesla already trading at a market cap of $1.5 trillion and a P/E ratio of 200, the stock seems more likely to underperform next year, despite current investor enthusiasm.
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Jeremy Bowman does not have a position in any of the stocks mentioned. The Motley Fool has positions in Tesla and Uber Technologies and recommends them. The Motley Fool has a disclosure policy.
