Should You Buy Tesla Stock, or Steer Clear?

Tesla (TSLA) stock has been trending higher, gaining over 35% since its Nov. 5 closing price to reach a two-year high. The rally follows CEO Elon Musk’s public support for President-elect Trump, which has positioned Musk as a potentially influential figure in the upcoming administration. The boost in Tesla’s stock shows investor optimism about how the new government could benefit the electric vehicle (EV) giant.

One of the key factors driving Tesla’s surge is a report indicating that Trump’s team plans to prioritize creating a federal framework for regulating self-driving vehicles. This regulatory push could fast-track Tesla’s autonomous ambitions, a key long-term growth catalyst. On Nov. 18, Tesla’s shares climbed more than 5% after Bloomberg broke the news.

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A Political Tailwind for Tesla

A friendlier incoming administration could mark a turning point for Tesla stock. The Trump team’s potential focus on setting national robotaxi standards might streamline approvals for autonomous vehicle deployment. This move would give Tesla a significant competitive edge in its robotaxi and Full Self-Driving (FSD) initiatives.

Moreover, if the Inflation Reduction Act (IRA) is revised, or parts of it repealed, Tesla could gain further. The IRA's current provisions support broader EV adoption, but changes might lead to higher tariffs on imported parts. Tesla’s vertically integrated supply chain could help it weather these changes better than its rivals.

Strong Q3 Earnings, with Some Caveats

Tesla’s latest financial results offered mixed signals. The company reported adjusted earnings of $0.72 per share, surpassing Wall Street’s estimate of $0.58. However, its revenue of $25.18 billion fell slightly short of the expected $25.37 billion. Despite the revenue miss, Tesla’s management provided an optimistic outlook regarding production growth and the upcoming launch of a more affordable EV.

The key highlight of Q3 was the improvement in automotive margins. Tesla’s cost of goods sold per vehicle dropped to a record low, reflecting increased production and more localized shipping. These factors helped Tesla to expand its operating margin by over 320 basis points year-over-year.

However, maintaining these margins won’t be easy. Tesla’s strategy of offering discounts to boost sales could pressure its profitability in the coming quarters. The company has hinted at continued price cuts to support its goal of growing vehicle deliveries.

Robotaxi and Humanoid Robots: A Glimpse into the Future

Tesla’s recent robotaxi reveal showcased ambitious projects like the Cybercab and Robovan. These fully autonomous vehicles promise to redefine urban transport. However, details were scarce. Production timelines are stretched, with Cybercab not expected before 2026. While Musk touted a sub-$30,000 price point, specifics on deployment scale and fleet ownership remain unclear.

Meanwhile, Tesla’s humanoid robot, Optimus, has progressed, but is still in its infancy. While promising, it’s too early to predict its financial impact.

Energy Business a Bright Spot

While Tesla faces challenges in the EV market, its energy division continues to thrive. In Q3, the energy generation and storage business reported a 52% increase in revenue. Further, the segment posted a record gross margin of 30.5%, reflecting a sequential increase of 596 basis points.  

This segment is becoming a vital growth driver, diversifying Tesla’s revenue and boosting profitability.

The Road Ahead: Opportunities and Risks

Looking forward, Tesla has several growth levers. The launch of a lower-cost EV in 2025 is expected to significantly boost deliveries. The company is targeting a 20%-30% increase in deliveries next year, fueled by this new model.

However, challenges persist. Demand in the broader EV market remains soft, and competition is heating up as legacy automakers and new players ramp up their EV offerings.

Valuation and Wall Street’s Take

Given its recent rally, Tesla stock looks expensive. The stock trades at 122.3 times its projected 2025 earnings of $2.77 per share. Given Tesla’s expensive valuation and competitive headwinds, Wall Street maintains a “Hold” consensus rating on the stock.

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Conclusion: Is Tesla Stock a Buy?

Tesla’s recent rally reflects optimism about its future under a business-friendly administration and the potential regulatory tailwinds for its autonomous vehicle strategy. The company’s strong Q3 margins, energy business growth, and upcoming affordable EV model add to its appeal.

However, challenges remain. The sustainability of its margins, competitive pressures, and uncertainties around FSD and Robotaxi deployment are key risks. Given these concerns, waiting for a more attractive entry point might be wise.

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On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.