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Tesla (TSLA) faces a pivotal moment as Inauguration Day is just a few days away. Investors are keenly watching the relationship between CEO Elon Musk and President-elect Donald Trump. Musk reportedly donated $132 million to Trump’s election campaign and will also head the Department of Government Efficiency (DOGE) within the new administration.
The electric vehicle maker’s stock has shown impressive gains, rising over 70% since Trump won the election in November. While Tesla has crushed broader market returns over the last two months, a prominent shareholder, Ross Gerber, has voiced concerns about Musk splitting his focus between Tesla and his growing political role.
According to Gerber, Tesla’s fair value is around $200 per share, which is 50% below current prices. Valued at a market capitalization of $1.3 trillion, Tesla stock has surged more than 1,100% over the past five years and commands a premium valuation. Let’s see if TSLA stock can continue to deliver outsized gains to shareholders in 2025 and beyond.
Tesla’s Strong Performance in Q3
Musk’s proximity to Trump has provided a massive tailwind for the world’s largest electric vehicle company. However, Tesla will have to shore up its financials and profit margins to continue delivering sizeable returns to investors in the upcoming decade.
In the third quarter of 2024, Tesla reported revenue of $25.2 billion, up 8% year-over-year. Focusing on operating efficiencies enabled the EV maker to report operating income of $2.7 billion, up 54% from the year-ago period. Its operating margin expanded to 10.8% from 7.6% over the last 12 months, while free cash flow totaled $2.7 billion, up from just $848 million in the year-ago period.
Tesla’s operating efficiency is impressive. In Q3, it achieved its lowest cost of goods sold per vehicle, at $35,100. This showcases its ability to control expenses amid a challenging macroeconomic environment.
Tesla emphasized that the Cybertruck appears to be gaining traction. In Q3, it became the third best-selling EV in the U.S. (behind only Tesla’s Model Y and Model 3). Additionally, the company’s supercharger network continued its rapid expansion, adding over 2,800 new outlets in the quarter.
What’s Next for Tesla Stock?
While the headline numbers look strong, there are some potential warning signs for Tesla. For example, vehicle delivery growth has slowed considerably as Tesla expects EV deliveries to grow marginally in 2024.
Moreover, competition in the EV space is intensifying, as legacy automakers ramp up their electric offerings. Newer entrants such as Nio (NIO), Lucid Motors (LCID), and Rivian (RIVN) are also expanding their manufacturing capabilities.
To offset competitive pressures, Tesla responded with price cuts in recent years, which has helped maintain market share but resulted in lower margins. While Tesla’s operating margin has improved to 8.4% in the past year, it is still lower than the 16.8% margin the company reported in 2022.
Tesla’s next growth phase appears to focus on two main areas: autonomous driving and new vehicle platforms. Further, plans for new vehicles, including more affordable models, remain on track for production to begin in the first half of 2025.
Is Tesla Stock Overvalued?
Analysts tracking Tesla expect adjusted earnings to expand from $2.49 per share in 2024 to $4 per share in 2026. Comparatively, its free cash flow is forecast to grow from $3.1 billion to $9.5 billion in this period. Priced at 100x forward earnings, TSLA stock trades at a lofty valuation in January 2025.
Out of the 37 analysts covering TSLA stock, 12 recommend “Strong Buy,” two recommend “Moderate Buy,” 14 recommend “Hold” and nine recommend “Strong Sell.” The average target price for TSLA stock is $292, indicating downside potential of 25% from current levels.
Tesla continues to demonstrate strong execution and industry-leading margins in the EV space. However, it’s entering a new phase of its growth story, with modest near-term expansion estimated and a focus on cost efficiency.
The key question is whether Tesla can maintain its technological edge and successfully launch its next generation of vehicles while facing increased competition. With more than $30 billion in cash and an expanding free cash flow margin, Tesla has enough resources to fund future innovations.
While Tesla’s stock remains richly valued compared to traditional automakers, its expansion into energy storage, AI, and robotics offers multiple potential growth vectors beyond vehicle sales. Investors should watch these developing business lines closely, as they could become increasingly important drivers of Tesla’s future value.
