How the Trump-Musk feud exposed the risk of the 'Musk premium' in Tesla's stock

Analysts estimate that a significant "Musk premium" is embedded in Tesla's stock price, with some suggesting the stock could be halved if Musk were no longer CEO. A recent feud between Musk and President Trump, sparked by disagreements over policy and personal attacks, sent Tesla shares down 14% last Thursday, highlighting the potential for political tensions to erode this premium; while the stock partially recovered after Trump softened his stance, analysts remain concerned about potential regulatory hurdles and long-term repercussions for Tesla's robotaxi ambitions.

Analysis

Wall Street widely acknowledges a significant "Musk premium" embedded in Tesla's (TSLA) valuation, with estimates of its magnitude varying considerably among analysts; Roth Capital Partners suggests the stock could halve without Musk, while others like Justus Parmar place it around 10%, and critics such as Jay Van Sciver argue Tesla would trade 80-90% lower if valued as a traditional auto manufacturer, given its revenue primarily stems from car sales and services. This premium contributes to Tesla's notable volatility, at times trading akin to a 'meme coin.' The fragility of this premium was recently demonstrated when a public feud between Elon Musk and President Trump, involving Musk's criticism of a tax bill potentially affecting EV credits and personal insults leading to Trump threatening to cancel government contracts, caused Tesla shares to plummet 14% in a single day. Although shares partially recovered following a détente, with Trump walking back a decision to sell his Tesla and Musk expressing regret over some posts, the incident underscored the stock's sensitivity to Musk's political entanglements. This is particularly pertinent as Tesla approaches its June 12 robotaxi day, with concerns that strained political relationships could impede crucial federal regulatory approvals for autonomous vehicles, thereby slowing market entry and ceding ground to competitors like Alphabet's Waymo. Tesla's stock is down nearly 20% year-to-date, trading around $333, and the company reported its first delivery decline in over a decade in 2024. Reflecting these concerns, Argus Research and Baird recently downgraded TSLA to Hold, citing the potential impact of the Musk-Trump feud.

Key Decisions for Investors

• Investors should recognize the substantial 'key person risk' associated with Elon Musk and the inherent volatility it imparts to Tesla's stock, as demonstrated by the recent 14% single-day drop.
• Closely monitor Elon Musk's public communications and relationships with political figures, as these have shown a direct and immediate impact on share price and could influence future regulatory approvals critical for growth areas like robotaxis.
• The upcoming robotaxi day on June 12 is a pivotal event; its outcome could significantly affect investor sentiment and provide clarity on Tesla's competitive positioning and ability to navigate regulatory challenges in the autonomous vehicle sector.
• Given the recent stock underperformance, analyst downgrades, and the first decline in deliveries in over a decade, a thorough reassessment of risk exposure to TSLA may be warranted, particularly considering the heightened sensitivity to non-fundamental factors.