Tesla (NASDAQ: TSLA) was 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 declining profits. Additionally, electric vehicle sales growth has slowed as momentum in the sector appears to be leveling off as early adopters have already purchased an EV, and EV stocks have generally struggled this year.
Through October 23, the stock was down 14% this year, underperforming S&P500which was up 21% by a wide margin, as shown in the chart below.
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 auto production would increase 20% to 30% by 2025, a significant improvement from flat growth in 2024.
Then Tesla soared after the election as Musk’s big bet on Trump seemed to pay off. Investors appear hopeful that the Trump administration will make it easier for Tesla to roll out its new Cybercab, also known as the robotaxi. Tesla also plans to launch an affordably priced Model Q for less than $30,000 in the first half of 2025. As you can see in the chart below, the stock is up a whopping 125% in less than two months through December 17.
As you can see, Tesla is bringing a lot of momentum into the new year. Will the stock continue to rise, or is it destined for a pullback? Here are a few things to look at.
Tesla shares were already expensive before the recent rally, but their valuation now appears to have become completely disconnected 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 price-to-earnings ratio above 51.
At that price, it will be difficult for Tesla to meet expectations as an automaker alone, since the company already sells almost 2 million vehicles per year. Those high 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. Considering that the Cybercab has not yet entered production and that there are regulatory hurdles for the company to overcome, it is certainly not guaranteed that its self-driving cars will be the Uber as Musk envisions.
Tesla’s shares have nearly doubled since the election, and Musk’s friendly relationship with Trump is a big reason for that. 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 lead the new Department of Government Efficiency, which is responsible for tracking government waste.
However, Musk and Trump are in some ways unlikely bedfellows. First, Trump is known to support fossil fuels over green energy, and his administration has already indicated it will eliminate the $7,500 EV tax credit. Musk has downplayed the effect of such a move, saying that it is much worse for EV startups than for Tesla, but that it will likely shift some demand for electric vehicles to traditional combustion vehicles for price-sensitive consumers, which would have a negative effect would have. for Tesla.
The real opportunity for the EV maker lies in autonomy, and the Trump administration has also indicated it would relax regulations around self-driving cars and establish a national standard, making it easier for Tesla to roll out the Cybercab, who does not have his own car. send.
However, safety will be the ultimate test for any autonomous vehicle, and if the cars are allowed to hit the road before they are ready, it could be a disaster for both Tesla and the Trump administration.
Tesla is one of the most unpredictable companies and its shares are notoriously volatile.
However, it enters the new year essentially priced for perfection at its current valuation. Autonomy is unlikely to have an impact as the company doesn’t plan to produce the Cybercab until 2026, although signs of progress could boost the stock.
Instead, investors’ attention will turn to its core business, the Model Q vehicle, and whether the Trump administration can help the company in any material way.
With Tesla already trading at a market cap of $1.5 trillion and a price-to-earnings ratio of 200, the stock seems more likely than not to underperform next year, despite current investor enthusiasm.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Tesla and Uber Technologies. The Motley Fool has a disclosure policy.
Will Tesla Stocks Rise or Fall in 2025? was originally published by The Motley Fool
