Photo-Illustration: Intelligencer; Photo: Getty Images
It has been a rough stretch for Tesla. The once-dominant electric-car company has seen plummeting sales across multiple continents. It faces tough competition from an explosion of sophisticated electric-vehicle manufacturers in China. The Cybertruck, its only major model release in recent years, has been a flop. And Republicans’ One Big Beautiful Bill Act kills federal tax credits for EVs and kneecaps Tesla’s profitable business of selling emissions credits. Perhaps most worryingly for Tesla, a good portion of its customer base has come to loathe the company’s CEO, Elon Musk, especially after he helped bankroll President Donald Trump’s victory in November last year, then spearheaded DOGE, which was chaotically implemented and resulted in thousands of federal layoffs and the near-destruction of USAID among other consequences.
Musk has undoubtedly done damage to the company he fashioned into a powerhouse; his reputation is a major driver of Tesla’s weak sales. Yet Tesla’s board dearly wants him to be more involved, not less. Last week, it offered Musk a compensation package that would make the richest man on earth significantly richer if he hits a series of audacious sales and profit targets. So where does this all leave a pioneering company that has become as divisive as almost any in America? For insight on that question, I spoke with Garrett Nelson, a senior analyst at the investment firm CFRA Research, who specializes in the auto industry.
You were quite bullish on Tesla’s future just a few months ago, predicting that the company was well positioned for Trump’s tariffs and that it would be a big winner this year in the market generally. But you’ve been significantly more bearish recently. A couple weeks ago, you said there would be no upside for Tesla’s stock in the next 12 months or so. What has changed in the interim?
I think the biggest thing is the bill that was passed on July 4 and the implications for Tesla with the federal tax credits going away. Even more significantly for them, it’s the change to the CAFE standards — the federal fuel standards. This has been a very significant bottom-line driver for the company for years. It was about $2.8 billion in revenue last year, up 54 percent over the year before. It’s been a very fast-growing and extremely high-margin revenue source because there’s no cost associated with it — it’s just them selling emissions credits to other automakers who haven’t met the same standards under the corporate average fuel economy.
The National Highway Transportation Safety Administration immediately stopped issuing noncompliance letters for violating that as soon as the bill was signed into law, so the revenue stream will be going away. And when I look at earnings and the trajectory of where I think estimates are going, it doesn’t look like they’ve accounted for that. Elon Musk’s admission on the last earnings call that we might be in for a few rough quarters was refreshing for us to hear because that’s kind of the way that we see it, and the primary reason why we turned more bearish, or less bullish — we have a “hold” on the stock here. But it’s also the market-share losses, not only in the U.S. market but in Europe and in China as well — the three major global auto markets. They just really haven’t recovered that lost market share, and they’re losing ground to other major EV manufacturers, such as BYD in China.
It does not seem like a positive picture right now.
Yeah. So our concerns are about the near-term and the intermediate-term earnings. We are still positive looking out longer term, five to ten years down the road, because they are focused on higher growth, high-tech areas of the economy, increasingly involved in robotics. They continue to make strides with the Robotaxi autonomous driving software. There’s a lot of R&D that’s happening at the company that I think will pay off over the longer term. But in light of the huge rebound the stock has had since April and an evaluation that we view as really bordering on the full side, it’s hard to justify this stock trading at what we view as well over 100 times next year’s earnings estimates on estimates that we think are still too high — so actually trading at much higher multiples than that when accounting for where we think estimates are going to be revised to in the near future.
The car business is only a part of what Tesla is doing. Musk recently said that about 80 percent of the company’s value would come from Optimus, its humanoid robots, and predicted that they would turn Tesla into a $25 trillion company. He has a long history of making these kinds of forecasts, and many of them don’t pan out, but he also has a long history of defying people’s gloomy predictions. Do you see anything backing up this kind of hype for these humanoid robots at this point, or is it more just that you and other investors have some faith in the company and him to make this happen?
I think he has a track record. If you look at his 2018 compensation plan, at the time no one thought that he could actually hit those milestones, and he did. The stock has performed very well over the long term, over the last five to ten years. And I think that’s why investors have such confidence in him. The proxy being issued, and this new compensation plan announced — it’s very ambitious.
That’s an understatement.
The market cap would essentially have to increase almost tenfold for him to meet all the criteria, to get the full award of about 12 percent additional stake in the company, which would bring his stake to about 25 percent. But I was following the company back in 2018, and people said the same thing. And at that point, the company, by Musk’s own admission, was just about a month away from bankruptcy. Tesla is in a much different state today financially. They have an investment-grade balance sheet, which is the exception, not the rule, if you look across the auto industry. And they’re sitting on about $37 billion of net cash.
On robotics, the big question in our view is about the competition. There are other robotics companies right now that are showing technological capabilities that are similar, if not better, than what Tesla has shown so far with Optimus. There are a lot of companies in China working on the same thing. So, I think the concerns are similar to the concerns about the car business, where Tesla has in a lot of ways been surpassed by some of the Chinese companies, and that’s why their market share has fallen so significantly over the last couple years. They’re now the fifth-largest or fifth best-selling EV manufacturer in China. In 2013, they were No. 2.
The other big part of Tesla’s business that we haven’t really touched on is autonomous vehicles. And that’s another area where it seems to be lagging behind the market leaders, like Waymo.
I don’t necessarily think they’re behind Waymo. I think Waymo is geographically in more areas than Tesla is right now. But Tesla has a very significant competitive advantage. What they’re using to develop their autonomous driving is much different and much less expensive. Waymo vehicles use LiDAR. Tesla’s approach is basically cameras and a global neural network that’s highly dependent on AI, essentially creating a global mapping system.
And we know Tesla has annual production capacities of over 2 million vehicles a year. Waymo hasn’t disclosed their capacity to our knowledge, but we think Tesla has significant advantages that will become clearer as they continue to expand to other markets aside from just Austin and the Bay Area. I think investors recognize that, and I think it is reflected in the stock’s performance, which continues to move higher. When I talk with clients and shareholders, there is a recognition that Tesla has really significant advantages over Waymo and other companies, and that’s a significant market opportunity that we estimate to be north of $5 trillion globally.
Tesla depends so much on just one guy. Obviously he’s made himself toxic to a lot of people with his far-right views and his close involvement in the Trump administration. That’s a big part of why the sales slump is happening. And yet, the company seems to be hanging a lot of its hopes on getting him more involved, as with this pay package. But does he seem like the same guy to you as he was in 2018? Back then he said he defied all these predictions, but he was much more focused on his companies. Even though he’s not in the Trump administration anymore, he still tweets all day about immigration ruining the world and so on. How do you price something like that in?
I think the increased political activism has really had an impact on the company’s financials. Going back to just over a year ago, I think last July, when he endorsed Trump and he then became the largest Republican donor in the 2024 election cycle, alienated or left a bad taste in the mouth for a lot of left-leaning consumers. That had an immediate impact on their sales and on their earnings.
Not just left-leaning consumers, but really most of the market base for Teslas.
That’s right. Well, he did pick up some consumers on the right, but then more recently he alienated a lot of those consumers when he got in this tiff with the president. So he’s now alienated consumers across the political spectrum. That’s another big concern we’ve had, and another reason why we lowered our rating on the stock. There’s been significant brand damage, and I don’t know where that leaves the brand, but every data point that we get is not positive in terms of their sales when you look at their market share compared to other companies. It’s something we’ve seen across the consumer space with other companies. When they get involved in a hot-button issue or take sides in terms of politics, it turns off a lot of consumers. There was Anheuser-Busch InBev with the Bud Light debacle, and more recently another company I follow, Harley-Davidson, and the Cracker Barrel thing just a couple weeks ago.
I think the difference is that there’s no face of Cracker Barrel who’s tweeting all day and who killed a bunch of government programs. I could see a future where there’s competing autonomous-vehicle brands here in New York City, and nobody would want to take a Tesla because they hate him so much.
And that’s the big issue. There’s arguably no executive that is more the face of a brand in the world. Elon Musk is the face of the Tesla brand, and that’s problematic, in our view. It’s done damage to the brand and we haven’t seen signs of a recovery from that. It’s going to take time.
But I would expect the pay package to be approved pretty easily because it aligns Musk’s interests with the interests of shareholders. The amounts of money — it’s unprecedented. A package like this has never been seen before when you talk about the $7.5 trillion required to hit all of the 12 tranches. I think you’re seeing the stock trade higher because shareholders recognize that if he is able to deliver on all of these thresholds, then investors will do very well. He essentially has to double the market cap of where Tesla is today to even hit the first threshold. That requires a doubling of the stock price from here, even after the company’s value has already moved up so much. And if that doesn’t happen, he gets paid nothing. There’s no salary, no bonuses.
The guy has more than $400 billion already, so is another several hundred billion going to be the thing that incentivizes him when he seems more driven by ideological concerns than financial ones?
When he left DOGE, that was viewed as a big positive. This would essentially keep him locked in for the next decade. And he said he was going to form this third political party but has backed off, which I think is another big positive. And I think this really locks him in for the next decade if it were to be approved, as we expect that it will be.
Would the company without him be significantly different, do you think? Would Tesla still be Tesla?
In our view, his presence at the company is a significant component of the value of the company — just his presence. We estimate roughly 30 percent of the value of the company is Elon Musk. So if something were to happen, if he were to leave the company, or get fired, I think you would see a very significant hit to the value of the company, just because there’s this perception that he’s going to continue to deliver and create value for shareholders by diversifying into these industries where maybe Tesla isn’t involved in today, such as robotics, and he’s going to create value for shareholders over the long term in a way that other executives would not be able to.
This interview has been edited for length and clarity.