Tesla stock (NASDAQ: TSLA) had a volatile day ahead of next week’s Q4 earnings release, plunging by nearly 5% in this morning’s session before rebounding by the market’s close.
The trigger for the morning sell-off? Reports that President Donald Trump and the Republican Congress could move to repeal the $7,500 electric vehicle tax credit granted through the Biden-era Inflation Reduction Act of 2022.
Does the EV Tax Credit Matter for Tesla?
That subsidy has been key to sustaining the rise in EV sales since 2020. But Tesla CEO Elon Musk has said that the removal of the tax credit and other subsidies “will only help Tesla.”
Unlike other U.S. automakers, Tesla actually makes a profit on its EV sales — partly due to economies of scale. In 2024, it sold more than six times as many EVs as its closest competitor, Ford, according to Kelly Blue Book.
But Tesla’s gross margins have faced challenges since late 2023, falling from 18.7% in Q2 2023 to 14.4% in Q2 2024, contributing to fears of a secular decline in profitability.
Tesla’s margins, however, rebounded to 18.5% in the third quarter of 2024. Whether those gross margins hold up is perhaps the most critical data point to watch in next week’s earnings report, indicating whether the company has the cushion to absorb the impact of the repeal of the EV tax credit.
Tesla Faces Growing Competition
The short-term future of the broader EV industry hangs in the balance as the Trump administration mulls a range of moves that could dent demand for battery-powered cars.
Already, the pace of EV sales growth is slowing, rising by just 7.3% in 2024.
But while Tesla is better positioned than its competitors in a post-EV subsidy world, it’s losing its first-mover advantage.
In 2023, Tesla sales were down by 5.6% according to Kelley Blue Book. And its share of the U.S. EV market has fallen to below 50%, for the first time ever.
Tesla’s two cheapest models, the Model 3 and Model Y, do the heavy lifting in terms of sales — and competitors’ offerings in their price ranges are only growing.
Indeed, legacy carmakers are releasing new models that are giving Tesla equivalents some serious competition.
Sales of the Cadillac Lyriq EV SUV soared more than three-fold, from 9,154 in 2023 to 28,402 in 2024 — outselling the Tesla Model X, whose sales fell by nearly 20%.
Hyundai Motor Company has hits in two EV segments: the Hyundai Ioniq 5 crossover SUV and the full-size Kia EV9.
Sales of the Ioniq 5 rose by 31% in 2024 to 44,400, according to Kelley Blue Book. And the acclaimed EV9 — which hits a sweet spot in the electrified three-row EV market with an MSRP of under $60,000 — sold over 22,000 units in 2024.
Tesla Brand Troubles
Now, Tesla sales may receive a boost later this year when the Model Y refresh is released stateside. It is being rolled out in China first.
But Tesla along with other Musk companies face growing brand risks that could impact their bottom lines.
Research and consulting firm Brand Finance says its estimate of Tesla’s brand value has fallen for the second straight year from $58.3 billion to $43 billion, due to Musk’s behavior and the company’s aging vehicle lineup.
The Tesla brand has a loyal customer base. But Musk’s own toxic behavior — including reported substance abuse, political extremism, and arguably inciting violence on his platform — represents shareholder risk that few other companies would tolerate.
Investors at some point may have to decide whether they are putting their money into a business or a cult.
A toxic reputation amid a more competitive market is a bad combination. After all, Michael Jordan — the world’s greatest pitchman — famously said, “Republicans buy sneakers, too.”
The Road Ahead
Tesla’s sky-high forward P/E of well above 100X rests on its transition from being an automaker to a technology company. That’s the upside that Tesla bulls are putting their hopes in. The same goes for Musk, who says the company’s long-term value is “overwhelmingly is autonomy.”
But how far away is Tesla from truly autonomous driving? Its Full Self-Driving remains at Level 2. Now, if Musk uses his political influence with the Trump administration to weaken regulation of autonomous driving, that might put his company a single crash away from major litigation.
Musk claimed at his robotaxi launch in October that Tesla would begin producing its Cybercab in 2026 — at a price below $30,000.
But Musk has a long track record of overpromising and underdelivering. In 2019, he said, “Next year, for sure, we will have over a million robotaxis on the road.”
It’s been roughly six years since he made that statement.
Robin Zeng, the chairman of CATL — the world’s largest EV battery maker — said in November that Musk “probably” really believes that a fully autonomous Cybercab is five years from production.
Zeng warned, “If you believe him [Musk] when he says two years, you will be in big trouble.”