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While U.S. stock markets rose to record highs following Donald Trump’s election as the country’s 47th president, there was quite a palpable pessimism towards green energy stocks. Renewable energy and electric vehicle (EV) stocks sold off after Trump’s election for obvious reasons. Tesla (TSLA) has been the notable exception, and has soared back into the league of trillion-dollar companies following Trump's election.
At the Republican National Convention, Trump vowed to "end the electric vehicle mandate on day one” without providing any specifics. To be clear, there wasn’t any such EV mandate in the first place, even as the Biden administration policies were quite supportive of green energy. The administration literally put money where its mouth is, and allocated billions of dollars under the Inflation Reduction Act (IRA) to spur the nation’s EV transition.
As part of the IRA, the Biden administration allocated money for supporting EV charging infrastructure and also expanded the EV tax credit to all vehicles. The move was beneficial for Tesla, whose cars had stopped qualifying for the EV tax credit after hitting the maximum shipment threshold.
What Could Trump’s Policies Mean for the EV Sector?
As ironic as it may sound, Musk – who Trump has termed a “new star” – is now among his biggest backers, even as the two hold nearly diametrically opposite views on energy policies.
Trump is a climate change denier, and pulled the U.S. out of the Paris Climate Agreement during his first presidency. Musk, on the other hand, is perhaps the unofficial brand ambassador of renewable energy and electric vehicles, and sees internal combustion engine (ICE) cars as headed for the same fate as steam engines.
Incidentally, Musk was part of Trump’s economic advisory council during the President-elect's first term, but quit his position, as it apparently became untenable for him to back Trump's decision to pull out of the Paris Climate Deal. However, while Trump has not changed his views on green energy – at least, not publicly – Musk has warmed up even more to the former President.
Trump has teased the possibility of naming Musk as his “Secretary of Cost-Cutting” in his second administration. Given how successfully Musk has managed costs at Tesla and X (formerly Twitter), there is little denying his “cost-cutting abilities.” X is a particular case in point, where Musk not only fired the bulk of the workforce, but the company went to the extent of doing away with janitors, and even stopped paying rents on some of its properties.
While these are still early days, Musk believes there is scope to cut federal spending by “at least” $2 trillion. The axe could also fall on some of the spending that the Biden administration directed to increase EV adoption in the country.
Could Trump Cut Down on EV Subsidies?
There are apprehensions that the Trump administration might end the $7,500 EV tax credit. The move could have some impact on Tesla, but it would be a bigger problem for some of the other EV companies.
The Trump administration might also end the “leasing loophole,” as under the IRA, personal cars are classified as "commercial vehicles” if they are leased. The loophole makes them eligible for the regulatory tax credit without the vehicle meeting the mandatory domestic battery and sourcing conditions.
Notably, during their Q3 earnings call, Rivian (RIVN) said that lease penetration in its sales mix was 42% during the quarter. It added that mostly the leased customers are getting the benefit of the full EV tax credit of $7,500, as not only is the cost of its vehicles high, but also the income levels of many of its customers are above the threshold specified by the IRA.
Trump could also tweak the corporate average fuel economy (CAFE) standards. While the move will help legacy automakers save some money, it would be a negative for pure-play EV companies. Tesla, for instance, earned $739 million selling regulatory credits in Q3, which was only a tad short of the record $890 million that it raked in during Q2. Rivian also expects to earn $275 million in regulatory credit sales in Q4, which should help the company post its first-ever gross profit in the quarter.
RIVN Stock Forecast
After Rivian’s Q3 earnings earlier this month, BofA downgraded Rivian stock from a "Buy” to “Neutral,” while cutting its target price from $20 to $13. Among other factors, the brokerage is concerned about the Trump administration’s policies towards regulatory credits.
Truist analyst Jordan Levy echoed similar views while maintaining his “Hold” rating. In his note, Levy said, “While we are incrementally positive on the timeline reiteration for R2, we see the recent election results and the incoming administration being an overhang over the entire domestic EV market for the time being given the uncertainty” around emissions regulations and regulatory credits.
Overall, a Trump-Musk combo increases the uncertainty for EV startups like Rivian, which don’t have the privilege of being structurally profitable like Tesla. Tesla has the scale, profitability, and organic cash flows to withstand any unfavorable EV policies under the Trump administration. As Wedbush analyst and noted Tesla bull Dan Ives said, “Tesla has the scale and scope that is unmatched in the EV industry and this dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment.”
For startup EV companies, though, Trump's return to the White House adds a layer of unpredictability at a time when they are already battling against tepid demand and massive overcapacity.
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