Shares of Tesla Inc. (NASDAQ: TSLA) have been the subject of much criticism in the past few months, as the company was seen as out of favor during the previous market cycle. This is especially the case as oil prices remain below $75 and struggle to rise, meaning that fuel costs aren’t high enough yet to justify ownership of electric vehicles as an alternative source.
Update Breaking News - Tesla shares surged on Monday after reports surfaced that President-elect Donald Trump's transition team plans to prioritize creating a federal framework to regulate self-driving vehicles for the U.S. Transportation Department.
However, a recent quarterly earnings release sent Tesla stock flying by over 20% in a matter of days, a rally that accelerated once the presidential election results were announced for the United States. As Elon Musk, Tesla’s CEO, personally took sides with the new administration, the market saw this as a good thing for Tesla’s future after the election. However, after a recent announcement, the script is now being flipped on its head.
The new administration is now looking to remove the previous EV tax credit of $7,500 that was previously placed in order to accelerate the transition from fuel cars to electric ones. Tesla stock sold off by over 15% in a few days as a reaction to the news. However, there are several reasons to believe this new credit removal is suitable for Tesla.
Tesla Will Capture More Market Share as Competition Struggles
Most will agree that the market’s reaction to the tax credit removal was natural. However, a bit more strategizing is needed before a decision is made on Tesla stock. The opposing camp will argue that these credits being removed can be a good thing for Tesla, and the sentiment could be right.
Why? There is no competitor in the EV and automotive space that has gotten close to what Tesla has accomplished in the United States in terms of scalability and adoption rates among users. The market has voted on this, and so have investors, with as simple a measure as market capitalization.
Tesla stock has a market capitalization of $1.3 trillion, while competitors like Rivian Automotive Inc. (NASDAQ: RIVN) have a market capitalization of only $10.3 billion. Or there’s Lucid Group Inc. (NASDAQ: LCID), which now has a much lower market capitalization of $6 billion. If this is any proxy, it should tell the world that Tesla is in a different class.
This is why removing the tax breaks is good for Tesla since smaller competitors won’t have the advantage of keeping their margins high enough to keep scaling and stay in business. Tesla, through its scale and adoption across the country, is able to maintain prices at a competitive rate with or without these tax breaks.
When competitors are forced to keep prices high because they lack the scale necessary to lower them, consumers will pick the more affordable and reliable Tesla product instead. That’s for the fundamentals of this story. Now, investors need to check how Wall Street and the markets feel about the stock after the news.
How Wall Street Views Tesla's Future Post-Tax Credit Removal
If price targets are of any indication, analysts are still on board with Tesla stock being able to deliver more value to shareholders from here. Particularly those at Wedbush, as they recently reiterated their “Outperform” rating for the company, this time with a $400 share price target to go with it.
To meet these targets and expectations, Tesla stock would need to rally by as much as 25% from where it trades today. This is an impressive feat, especially after a rally of 83.4% for the past six months alone. However, there are other reasons to believe that Tesla’s valuation is still not reflective enough.
This is not just a car company; Tesla plays in some of the world’s most considerable tailwinds in technology and artificial intelligence. This feature could bring the stock much higher than it sits today.
According to Ron Baron in a CNBC interview, this potential valuation could be as high as $1,200 a share. While bold, these assumptions are widely adopted by more and more market participants today, especially institutional ones.
Allocators at Geode Capital Markets recently added 1.8% more to their Tesla stock position, bringing their net holdings up to $15.5 billion today, or 1.8% ownership in the company. Moreover, bearish traders failed to keep the selloff going after the tax credit news.
Instead of fueling the fire, short sellers actually ditched their positions, as judged by the 1.8% decline in short interest for Tesla stock over the past month. This bearish capitulation in the middle of what is supposed to be a negative development for Tesla’s business should have had the opposite effect on the company’s short interest, a good sign for investors.
