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There has been a shakeup in the trillion-dollar market cap club, as both Tesla (TSLA) and Broadcom (AVGO) have recently joined the ranks. While Broadcom is a new entrant - and only the second chip company to command a market cap of over $1 trillion, after who else but Nvidia (NVDA) - the milestone might spark a sense of déjà vu for Tesla.
Tesla first became a trillion-dollar company in November 2021, but soon lost the title amid a widespread tech sell-off. Tesla could not reclaim its $1 trillion market cap despite last year’s rally, and it seemed it the stock wouldn't be able to do so in 2024, either, given TSLA's dismal price action in the first half of the year.
TSLA Shares Have Gained Over 70% Since Trump’s Election
However, the results of the U.S. presidential elections triggered a rally in Tesla shares. With an over 70% rally in TSLA since Nov. 5, the stock has not only rejoined the trillion-dollar market cap club, but CEO Elon Musk has now become the world’s first person to claim a net worth above $400 billion.
Amid the breathtaking rally, Tesla kept rising even above Wall Street's most optimistic target price – let alone analysts' average target price, as it often does anyway.
After Donald Trump’s election, brokerages went into an overdrive raising their target prices, with Dan Ives of Wedbush Securities raising his target to a Street-high of $400. Now, Ives has raised his target price again, to a new Street-high of $515, along with a bull-case prediction of $650. The longtime TSLA bull expects Tesla to become a $2 trillion behemoth in 2025.
In this article, we’ll examine the headwinds and tailwinds that Tesla faces in its journey to becoming a $2 trillion company.
Trump’s Policies Might be Favorable to Tesla
Trump’s energy policies are no secret. and the president-elect has vowed to end the “EV mandate” – policies designed to disincentivize driving gas-powered cars – on the very first day of his presidency. The rise in Tesla – a company that’s almost synonymous with green energy – after the election of a climate change denier like Trump might sound a bit perplexing. However, Tesla is much more than electric vehicles, and the company is now increasingly becoming a tech and artificial intelligence (AI) play.
By Musk’s admission, Tesla’s valuation is linked to the progress of its autonomous driving technology. The company will use autonomous driving to power its upcoming robotaxi, dubbed the Cybercab. Reports now suggest that Trump might ease crash-reporting requirements, which would be a big positive for Tesla, as the company has been at loggerheads with regulators over multiple crashes – including fatal ones – linked to its Autopilot and Full Self-Driving (FSD).
The very name “full self-driving” that Tesla uses for its advanced self-driving subscription has been a point of contention with regulators, as the software is nowhere near being fully autonomous as the name might suggest. A more “supportive” regulatory environment would help Tesla expedite its autonomous driving capabilities, and by extension its Cybercab. Trump’s AI policies might also be a boon for Tesla, which is building the Optimus humanoid that Musk believes could add $25 trillion to the company’s market cap.
Tesla’s valuation multiples have expanded over the last month in hopes of a better regulatory environment under Trump. While I believe that some re-rating was warranted, and Trump’s perceived proximity to Musk and his stance towards fewer regulations are positive for Tesla, there are some risks that investors need to watch out for in 2025.
Key Risks That Tesla Faces in 2025
While Tesla might continue to make progress on its long-term goals, the company faces some headwinds as we enter 2025. First, while Musk has touted 2025 delivery growth of up to 30%, that number looks a bit too optimistic to me, even with the new low-cost model that Tesla expects to launch next year.
Second, Tesla will need to show concrete progress in autonomous driving, as the company has missed several previous deadlines to achieve full autonomy – most recently in 2023. Third, Musk’s closeness to Trump is a double-edged sword, as it could deter some on the opposite side of the political divide from buying a Tesla car. The company also risks getting dragged into the U.S.-China trade war, which could impact its business in China - Tesla's second-biggest market, and home to its most efficient Gigafactory.
Finally, Tesla’s valuations based on the near-term earnings have started to get a bit expensive, and it trades at 139x its one-year forward earnings, and 200x free cash flows. While Tesla’s story is more about long-term initiatives like autonomous driving, humanoids, and supercomputers, the near-term challenges to its core automotive business look like a pertinent threat as we head into 2025.
All of that said, I won’t be surprised if TSLA becomes a $2 trillion giant in 2025, given the continued euphoria towards the Elon Musk-run company - no matter how much valuation purists scoff at the company’s premiums.
