Tesla’s $600 Billion Run-Up Looks Past Major Risks to EV Growth

(Bloomberg) — Tesla Inc. shares have nearly doubled in value since the last time the company reported earnings— a set-up that usually spells high expectations for upcoming results. But its car-selling business has become a sideshow to Elon Musk’s political prominence.

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A large chunk of its mammoth market value has been propped up by hopes it will be among the first to develop and market fully self-driving vehicles. Those expectations were turbocharged by Donald Trump’s election victory, as investors bet the closeness between Tesla’s chief executive officer and the US President will pave the way — ignoring cash flow risks from a possible roll-back of EV incentives.

It’s almost as if the company’s ability to profitably build and sell the cars no longer counts. Trading in the options market suggests investors are preparing for a 7% move in either direction off Tesla’s fourth-quarter earnings report, due after Wednesday’s market close. That would be the stock’s smallest post-results swing since October 2022. Shares fell as much as 3.4% on Wednesday, while the broader S&P 500 Index declined 0.9%.

“The market is behaving as if Tesla’s results don’t matter, and that may catch investors flat-footed in case of a large shock,” said David Wagner, portfolio manager at Aptus Capital Advisors. “The electric car business is still about $200 billion in market value, but it is still the funding mechanism for a lot of the actual sideshows.”

The stock has added nearly $600 billion to its market value since reporting the last quarterly numbers. Yet in many ways, Tesla shares have become a vehicle for investors to wager on Musk himself, rather than the company. That has advantages, but also poses risks.

On one hand, the shares are now unencumbered by mundane details of growth and profitability. Earlier this month, the EV-maker reported fourth-quarter deliveries that missed analysts’ projections, and marked the first drop in annual sales in more than a decade. The stock, which is one of the most expensively valued in the S&P 500 Index, fell on the day before quickly rebounding.

The flip side is Tesla is now vulnerable to the twists and turns of a potentially volatile relationship. Musk last week openly questioned if companies that joined the Stargate artificial intelligence venture announced by Trump had the funds to follow through on promises. Trump and the Republican party are generally anti-EV, and the president has ordered his administration to consider eliminating related subsidies and policies.

That can be a major headache for Tesla, which in the third quarter of 2024 generated $739 million in revenue from selling regulatory credits to car manufacturers that need to comply with strict pollution standards. In the quarter before that, it hauled in $890 million. Barclays analyst Dan Levy estimates that about two-thirds of Tesla’s US sales, or 20% of its global sales, benefit from EV tax credits that encourage consumers to buy electric cars. It’s not yet clear how the different subsidies and incentives will be impacted.

“Fundamentals remain secondary versus the broader theme of narrative command for Tesla, which has gone into hyperdrive since the US Elections last November,” Levy wrote in a note to clients earlier this month. “It’s important to note this move has very little to do with EVs, as the Election catalyst is objectively a negative for EVs.”

The pitfalls of ascribing eye-watering valuations to future potentials — be it artificial intelligence or robotaxis — came into sharp focus Monday, when the biggest US technology stocks nosedived on fears that Chinese artificial-intelligence startup DeepSeek could disrupt the current AI business model.

Between $500 billion and $600 billion of Tesla’s current market capitalization is based on its EV and energy businesses, according to Evercore ISI analyst Chris McNally, with the rest pinned on efforts toward self-driving cars and humanoid robots. Calculations by Nicholas Colas, co-founder of DataTrek Research, show that over 90% of Tesla’s share price is tied to what the company might do in the future.

Still, some say the very nature of Tesla’s core business can also protect it from a sudden DeepSeek-like shock.

“Any company is subject to disruption, but since the auto manufacturing business has a much longer cycle than computer software/hardware, I think that Tesla’s vulnerabilities will occur a bit more slowly,” said Steve Sosnick, chief strategist at Interactive Brokers.

A look into how traders are positioning for Tesla’s earnings report on Wednesday also shows optimism continues to rule. Citigroup equity and derivatives trading strategist Vishal Vivek estimated that options market positioning was about “7 out of 10 bullish.”

“Musk can engineer a stock rally with just a few words on the conference call even if the fourth-quarter numbers themselves are bad,” said Adam Crisafulli, founder of market intelligence firm Vital Knowledge. “That makes the stock extremely difficult to assess, especially around earnings.”

Tech Chart of the Day

ASML Holding NV surged the most since 2020 after booking orders worth twice as much as analysts expected, as the artificial intelligence boom fuels demand for its chipmaking machines. The Dutch company reported bookings of €7.09 billion ($7.4 billion) in the fourth quarter, it said in a statement on Wednesday. That compares with an average estimate of €3.53 billion by analysts surveyed by Bloomberg.