Tesla's Trump Boost: Is the Stock Rally Sustainable?

In the wake of President-elect Donald Trump's victory, Tesla shares have surged, adding $350 billion to its market capitalization. However, UBS analysts caution that this rally may not be supported by fundamentals, warning of a potential 35% drop in the stock. This article explores the factors contributing to Tesla's recent stock performance and the concerns raised by UBS analysts.

Tesla's stock price has been on a rollercoaster ride, with market sentiment and external factors playing significant roles in its fluctuations. Following Trump's election, investors bet on a huge Trump boost, leading to a 41% surge in November 2024. However, UBS analysts, led by Joseph Spak, maintain a 'sell' rating, arguing that the rise is mostly driven by "animal spirits/momentum" and not actual business improvements.

UBS's valuation concerns regarding Tesla's expensive AI investments have impacted the stock's performance in recent months. The analysts estimated that only 28% of Tesla's market cap could be attributed to its core auto business, with the rest tied up in hopes outside of it, particularly AI initiatives. Despite the analysts' warnings, Tesla's stock price has continued to rise, fueled by market exuberance and momentum.

Tesla's fundamentals lag behind its peers in the automotive industry. In 2024, Tesla's operating margin was 11.4%, compared to an average of 18.5% for its peers. Meanwhile, Tesla's free cash flow yield was 0.9%, which pales in comparison to the 6.7% average of its peers. Revenue growth has also been a challenge for Tesla, with a CAGR of 27.2% from 2020 to 2024, below the industry average of 32.4%.

UBS analysts caution that Tesla's stock price, fueled by the Trump rally, does not align with its fundamentals. They predict a potential 35% drop in the stock, warning investors that the Trump-fueled rally may not be sustainable. The analysts argue that Trump's policy changes, such as removing electric vehicle subsidies, could force Tesla to cut prices and potentially slow growth.

Geopolitical events, particularly the U.S. elections, have significantly impacted Tesla's stock price and market capitalization. Following Trump's victory, Tesla shares surged nearly 30% in a week, reclaiming a $1 trillion market cap. However, investors should monitor Tesla's fundamentals and policy changes for long-term stability, as the Trump-fueled rally may not be supported by business fundamentals.

In conclusion, Tesla's stock price has been influenced by market sentiment and external factors, such as the U.S. elections. While the Trump-fueled rally has driven the stock's surge, UBS analysts caution that this rally may not be sustainable, warning of a potential 35% drop in the stock. Investors should closely monitor Tesla's fundamentals and policy changes to ensure long-term stability.