What Elon Musk’s feud with Trump means for Tesla shareholders

Elon Musk's recent feud with Donald Trump has negatively impacted Tesla, with shares plummeting 14.3% and erasing $153 billion in market capitalization after Musk criticized Trump's budget bill. Experts suggest that Musk's actions have transformed his political connections from an "insurance policy" into a liability, potentially inviting retaliation against Tesla, while his continued focus on ventures outside of Tesla is distracting from the company's core business and eroding investor confidence. Despite a partial recovery, Tesla's stock remains significantly below its recent high, and analysts warn that Musk's behavior, which would typically lead to the removal of a CEO, is sustained only by his control over the board and the "Musk magic premium" that significantly inflates Tesla's valuation.

Analysis

Elon Musk's recent public feud with Donald Trump, following his 130-day tenure at DOGE, has significantly impacted Tesla, transforming a perceived political 'insurance policy' into a substantial liability. This shift is exemplified by a 14.3% single-day drop in Tesla's shares, erasing $153 billion in market capitalization, with the stock currently trading 40% below its mid-December peak. Experts note that Musk's actions, including backing far-right European politicians which reportedly impacted sales in Germany and France, and his subsequent criticism of Trump's budget bill, now expose Tesla to potential political retaliation—a risk not faced by its competitors who are already navigating diminishing EV subsidies. Compounding these issues are concerns over Musk's divided attention across multiple ventures (SpaceX, Neuralink, X) while Tesla faces mounting problems, including shrinking market share in China and declining earnings. Tesla's Q1 results indicated losses from car and battery sales, with profits reliant on regulatory credits, and core auto/battery earnings over the last four quarters have fallen to $3.5 billion from $12 billion in 2022. Despite this, Tesla's $960 billion valuation is largely sustained by an estimated $800 billion 'Musk magic premium,' contrasting sharply with a fundamentals-based valuation closer to $100 billion. Governance issues persist, with Musk's 30% share ownership and board loyalty, partly due to lucrative options grants, shielding him from accountability for actions that would typically lead to a CEO's dismissal. The pending Delaware Supreme Court decision on his $56 billion compensation package adds further uncertainty; an unfavorable ruling could diminish his stake and incentive, while a board attempt to reinstate it, potentially via a shareholder vote, carries risks of rejection and a subsequent 'succession problem.' The company's re-incorporation from Delaware to Texas is also seen as a move to make legal challenges against the board more difficult.

Key Decisions for Investors

• Investors should brace for continued volatility in Tesla's stock, given the heightened political risk stemming from Musk's conflict with Trump and the potential for retaliatory actions against the company.
• Closely monitor the outcome of the Delaware Supreme Court appeal concerning Musk's $56 billion compensation package, as its resolution could significantly impact his ownership stake, influence, and commitment to Tesla.
• Re-evaluate the 'Musk magic premium' embedded in Tesla's valuation against the backdrop of declining core automotive earnings, increased governance concerns, and the potential for brand damage from Musk's activities.
• Consider the downside risk if Musk's influence wanes or if he departs, which could lead to a re-rating of Tesla's stock more in line with traditional automotive industry multiples, despite the potential for a more focused operational leadership.