I consider Tesla (NASDAQ:TSLA) stock's price growth of over 150% in the last six months to be remarkable, but it is also potentially an indication of speculative behavior by the market. However, my valuation model suggests that the stock remains reasonably valued when considering its five-year growth and margin expansion prospects amid its pivot to autonomous vehicles as its primary revenue generator. Reports indicate that under the impending Trump administration, the regulatory environment is likely to become less severe for Tesla, opening up a potentially faster path to its autonomous taxi network operating at scale.
Operational analysisRecently, the Trump transition team recommended eliminating a federal requirement mandating automakers to report crashes involving advanced driver-assistance or self-driving technologies within 30 seconds of an incident. This could benefit Tesla by reducing the scrutiny and regulatory burden associated with its crash data, but it does raise concerns about transparency and safety oversight. The National Highway Traffic Safety Administration ('NHTSA') has emphasized the importance of crash data for assessing and improving vehicle safety as automated driving technologies evolve.
This is not the only benefit Tesla may receive under the impending Trump administration, which Musk was pivotal in actualizing. Musk reportedly spent over $250 million supporting Trump's re-election campaign, making him the largest single donor in the 2024 election cycle. This included $238 million funneled through America PAC, a super PAC supporting Trump, and $20 million to another PAC focused on targeted advertising.
Musk has been actively involved in shaping Trump's transition team, participating in discussions about federal policies and regulations. Reportedly, his role extends beyond advisory functions to influencing hiring decisions for key positions in the administration.
I, for one, am quite bullish on Musk's involvement in the American government, both for macroeconomic prosperity, international diplomacy, and public equity growth. As it relates to Tesla, I find a more lenient regulatory environment surrounding autonomous vehicle approvals and emissions standards quite likely. Trump has also promised to eliminate the Biden-era EPA emissions standards and EV mandatesTesla stands to benefit from this because it is already profitable in the EV space, unlike its competitors. The removal of these mandates will likely slow down the transition for legacy automakers like Ford (NYSE:F) and General Motors (NYSE:NYSE:GM), giving Tesla an opportunity to further dominate the market. Tesla has already proven it can thrive without subsidies, so eliminating the federal EV tax credit could weaken its rivals like GM, Ford, and Rivian (NASDAQ:RIVN).
In addition to the above-mentioned benefits to Tesla under the impending Trump administration, Musk's close relationship with the president could influence tariff policies that protect Tesla's interests in China while potentially disadvantaging foreign competitors exporting EVs to the United States. Indeed, when considering all of these elements, the next four years look robust for Tesla, and if a Republican candidate succeeds Trump, we could see an extended period of prosperity in America that directly supports Tesla's autonomous taxi and humanoid robot ambitions, primarily through more favorable regulations.
Valuation analysisGiven the above catalysts, which are likely to accelerate operational progress and financial returns for Tesla, it does not seem unreasonable for Tesla to achieve a 20% revenue CAGR over the next five years if it successfully executes its autonomous taxi and humanoid robot pivot.
The company's trailing 12-month revenues are $97.15 billion. Therefore, if it increases this at a 20% CAGR over the next five years, Tesla will have trailing 12-month revenues of $241.74 billion in December 2029.
A large strength of Tesla's future strategy, hinged on autonomy, is that it is likely to command much higher margins related to lower manufacturing costs and greater reliance on software for its revenues, particularly with autonomous taxis taking the bulk of its revenues for the foreseeable future. At an EBITDA margin of 20% by 2029, the company will have a trailing 12-month EBITDA of $48.35 billion in December 2029.
The company's EV-to-EBITDA ratio has already expanded significantly in recent weeks due to increased sentiment from the impending Trump administration. However, with scaling EBITDA and stabilizing growth rates, I expect the company's valuation ratios to contract somewhat. For my model, I use a conservatively optimistic terminal multiple of the midpoint of its five-year average trailing 12-month EV-to-EBITDA and five-year average forward EV-to-EBITDA ratios, 65. Therefore, I estimate Tesla will have an enterprise value of $3.14 trillion in December 2029. As Tesla's current enterprise value is $1.38 trillion, this implies a five-year CAGR of 17.89%.
Tesla's weighted average cost of capital ('WACC') is 15.23%, with an equity weight of 99.29% and a debt weight of 0.71%. The cost of equity is 15.31%, while the cost of debt is 2.97%, with no tax impact due to a 0% effective tax rate. Discounting my estimate for Tesla's December 2029 enterprise value to the present day using the WACC as the discount rate, the implied current intrinsic enterprise value is $1.55 trillion. This indicates a 12.09% margin of safety against the current enterprise value of $1.38 trillion.
Risk analysisThe first major risk related to a reduced regulatory framework surrounding autonomous taxi crashes under the impending Trump administration is that Tesla's reputation may suffer if its autonomous cars are involved in severe accidents, especially fatal ones. As mentioned in my operational analysis, the NHTSA is concerned that without comprehensive crash-report data, regulators may struggle to detect safety issues early, potentially increasing risks on the road. Tesla must strike a careful balance between forward progress and responsible deployment of its vehicles if it ends up operating in a relaxed regulatory environment in 2025 and beyond.
Moreover, while unlikely, reduced regulations regarding autonomous taxis could negatively impact public perception of Tesla's robotaxis and full self-driving capabilities, even without crashes occurring, at least for some time. Fear of accidents could take precedence, causing lower growth than anticipated in my valuation model. These consumer sentiment dynamics could mean Tesla is actually overvalued, or at least fairly valued, at this time.
Finally, my valuation model is optimistic. While bullish, I believe there is good reason to expect Tesla will sustain high valuation multiples, expand margins, and maintain solid revenue growth as it scales its robotaxi and autonomous robot offerings. Musk has stated that robotics could be one of the largest revenue generators in technological history. Despite his tendency for hyperbole, this statement carries enough truth to make Tesla's potential returns quite remarkable over the next few decades.
ConclusionWith Tesla stock rising almost 150% in price over the last six months, it's tempting to sell the stock now due to overvaluation concerns. However, with a long-term horizon and confidence in the company's future growth prospects and sustained strong market sentiment, I'm convinced Tesla can reach a $3 trillion valuation or higher in the next five years. With its enterprise value likely to exceed a 15% CAGR during this period, I consider the investment worth holding rather than selling for long-term investors, despite the likelihood of significant volatility amid its medium- to long-term uptrend.