Tesla (TSLA +2.96%) 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 falling profits. Additionally, electric vehicle sales growth has slowed as momentum in the sector seems to be plateauing now that early adopters have already purchased an EV, and EV stocks have struggled in general this year.
Through Oct. 23, the stock was down 14% year to date, underperforming the S&P 500, which had gained 21%, by a wide 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 soared following the election as Musk's big bet on Trump seemed to pay off. Investors seem to be hopeful that the Trump administration will make it easier for Tesla to roll out its new Cybercab, also known as the robotaxi. Tesla is also planning to launch an affordably priced Model Q at under $30,000 in the first half of 2025. As you can see from the chart below, through Dec. 17, the stock is up a whopping 125% in less than two months.
As you can see, Tesla is bringing a lot of momentum in the new year. So, will the stock keep gaining, or is it destined for a pullback? Here are a few things to watch.
Image source: Tesla.
High expectations are now baked in
Tesla stock was already expensive before its recent rally, but its valuation now seems to have fully detached 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 meet expectations as a carmaker alone, as the company is already selling nearly 2 million vehicles a year. Those high expectations seemed to be based on Musk's own predictions for the company's autonomous vehicle business, as he said that Tesla would be the most valuable company in the world if its robotaxi marketplace takes off. Considering that the Cybercab hasn't yet gone into production and that there are regulatory hurdles for the company to overcome, it's certainly not guaranteed that its driverless cars will replace Uber as Musk has envisioned.
How much help will Trump really be?
Tesla stock has nearly doubled since the election, and Musk's chummy relationship with Trump is a major reason why. Musk spent hundreds of millions of dollars on Trump's campaign and appeared on stage with him several times. He's also been tapped to run the new Department of Government Efficiency, in charge of ferreting out 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 effect of such a move, saying it's much worse for EV start-ups than it is for Tesla, but it's likely to shift some demand for EVs back to traditional combustion vehicles for price-sensitive consumers, which would be a 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 roll out the Cybercab, which does not have a steering wheel.
However, safety will be the ultimate test of any autonomous vehicle, and if the cars are allowed on the road before they're ready, it could be a disaster for both Tesla and the Trump administration.
NASDAQ: TSLA
Key Data Points
Is Tesla a buy for 2025?
Tesla is one of the more unpredictable companies, and its stock is notoriously volatile.
However, it's entering the new year essentially priced for perfection at the current valuation. Autonomy is unlikely to have an impact as the company isn't planning on producing the Cybercab in 2026, though signs of progress could give the stock a boost.
Instead, investor 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 material 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 than not next year, despite the current investor enthusiasm.
