Tesla (TSLA -4.97%) has been a great American success story, but the company has received a significant assist from the government over its history, including more than $11 billion in regulatory tax credits over its history and a crucial low-interest loan from the Department of Energy when it was just getting started.
Perhaps the best-known government handout Tesla has benefited from is the $7,500 electric vehicle (EV) tax credit, which slashed prices on some of its vehicles by 20% or even more in some cases. The credit gained prominence in 2022 as part of the Inflation Reduction Act designed to encourage Americans to replace gas-powered vehicles with EVs, but it expired on Sept. 30, and the move is expected to rock the EV market.
In fact, EV sales have soared in anticipation of the end of the discount. Cox Automotive reported that third-quarter EV sales are up 21.1% from a year ago, and there were other signs of a boom before the deadline as well.
That trend is likely to help Tesla in Q3, but the EV giant also stands to be the biggest loser from the change in the law.
Image source: Tesla.
What's at stake for Tesla
While Tesla stock has surged in recent months, approaching its all-time high, the EV business is clearly struggling. Vehicle unit sales were down last year and have continued to decline, and automotive revenue fell by 16% in Q2 to $16.6 billion, driving an overall revenue decline of 12% to $22.5 billion.
For Q3, revenue is expected to be flat, which could reflect the pull-forward effect from expiring credits.
EVs don't just compete against other EVs. While some car buyers may be specifically looking for an EV, others are price sensitive and are going to buy the vehicle that gives them the most value. Research firm Rhodium Group predicted that the change in the law would cut EV sales by 16% to 38% versus where they would have been.
While Tesla CEO Elon Musk has waffled on the impact of the end of the EV tax credit, at one point saying it would offer his company a competitive advantage because Tesla needs it less than other EV makers, he has acknowledged the affordability pressure the company faces.
In Tesla's Q3 2023 earnings call, Musk shared a familiar complaint on elevated interest rates, saying:
I am worried about the high-interest rate environment that we're in. I just can't emphasize this enough that the vast majority of people buying a car is about the monthly payment... If interest rates remain high or if they go even higher, it's that much harder for people to buy the car.
Interest rates have remained elevated since then, though the Fed forecast two more cuts this year, and Tesla's sales have suffered. However, the impact of the loss of the $7,500 tax credit is going to be even bigger than a couple of percentage points in interest rates.
More recently, Musk seems to have reversed his earlier position that Tesla would benefit from the removal of the EV tax credit, as he has taken to protesting it.
Musk now seems to be recognizing the bill for what it is: a law that advantages the oil and gas industry and ICE vehicles over Tesla and EVs.
In addition to the loss of the EV tax credit, Tesla is also losing out from the removal of the Corporate Average Fuel Economy (CAFE) compliance credit, which was eliminated by the "Big Beautiful Bill." That credit required automakers that didn't meet fuel efficiency standards to buy credits from automakers like Tesla, and it had become a significant revenue stream for the company, contributing $2.67 billion in revenue in 2024. Without them, Tesla's profits could take a significant hit.
Is Tesla a buy?
Tesla's stock has surged in the last month, even though there's been little fundamental news out on the company. Instead, Musk's own enthusiasm and hype, including a purchase of $1 billion of Tesla stock, seem to have sent the stock higher. He also predicted that the Optimus autonomous robot would one day represent 80% of the company's value.
However, even if Q3 deliveries surprise to the upside, Tesla still looks overvalued at this point, especially given the loss of the EV subsidy and the broader headwinds on electric vehicles. Investors are better off waiting for a more attractive entry point or clearer signs that Tesla is returning to sustainable growth before buying the stock.
