Tesla’s stock is making a comeback. But it’s about to face a massive challenge

By Chris Isidore, CNN

New York (CNN) — Tesla’s stock closed higher Tuesday for the fifth straight day, a remarkable and sustained rally that has recaptured a quarter of the value it lost in the last three months. It may not last.

The stock had been plunging as Tesla’s sales have fallen sharply, particularly in Europe and China, where competition for electric vehicles is fierce. Recent attacks on Tesla showrooms and vehicles in the United States hasn’t helped either – they’ve been in response to CEO Elon Musk, whose high-profile role in the Trump administration has been broadly unpopular. Even the used car market for Teslas is crumbling.

Musk has pushed for tens of thousands of federal layoffs as head of the Department of Government Efficiency, or DOGE. He’s also backed far-right candidates in Germany and the United Kingdom. And he has promoted bigotry and conspiracy theories on his social media platform, X.

But in the past week, Tesla’s shares have bounced back somewhat after Musk committed to ambitious plans during an “all hands” company meeting on Thursday. Shares climbed 5% on Friday, 12% on Monday and more than 3% Tuesday.

Thursday’s meeting might have been just part of the reason for the turnaround. Some investors might think that the stock had become oversold in its recent slide. JP Morgan analysts last week noted that Tesla shares attracted the greatest interest among individual investors. Some Wall Street analysts argue that Tesla’s sales problems could be short-lived and the company could become much more valuable in the future.

Tesla’s stock may also be bouncing back because of a “short squeeze,” in which investors bet on a stock to go down in price and need to purchase shares to cover those bets. Tesla has long been a favorite of short sellers.

Still, the company’s sales outlook, among other problems, could make this rally short-lived.

The face of controversial policies

Musk’s close ties to President Donald Trump helped lift the shares 91% between Election Day and just before Christmas, as investors bet that the Trump administration would enact policies that would benefit Tesla and Musk’s other privately held businesses, such as SpaceX.

But investors didn’t count on Musk becoming the very public face of the controversial and largely unpopular DOGE.

As a result, Tesla showrooms have become home to protests against Musk and the Trump administration. Some Tesla owners are dumping their cars. Vehicles and charging stations have been set on fire, and some showroom windows have been shot out.

Shares plunged 53% from that December all-time high through trading last Tuesday, wiping out all of the post-election gain and then some.

Of even greater concern to investors, beyond the brand damage, has been the worry that Musk now spends most of his time on DOGE and almost no time on Tesla.

A ‘pivotal year’ for Tesla

Musk has said this is a “pivotal year” for the company – a year in which it must prove it can stand up to protests and increased competition, especially from Chinese automakers, such as BYD, which is poised to pass Tesla as the world’s largest seller of electric vehicles.

Tesla reported its first-ever annual drop in sales last year. While it was only a 1% decline from the 2023 total, it was a stunning change from the previous five years, when annual sales gains came in at between 37% and 87% percent. The company’s industry-leading stock value has long been boosted by expectations that growth would continue.

The fourth-quarter sales report left Tesla just barely ahead of BYD in full-year EV sales and 20% behind its Chinese rival in the fourth quarter.

While BYD doesn’t sell vehicles in the United States, it is taking market share in Europe and, crucially, China, the world’s biggest market for EVs and Tesla’s second largest.

So last week’s all-hands meeting at Tesla was crucial for its plunging stock, said Dan Ives, an analyst with Wedbush Securities and a Tesla bull.

“That sent an important signal to employees and shareholders,” Ives told CNN Tuesday. “It was (Musk’s) way of showing that he’s going to be more involved in Tesla and less involved in DOGE going forward.”

Another Tesla bull, Cathie Wood of Ark Invest, in an interview with Bloomberg on Monday stuck by a June forecast that she expects its shares, which closed Tuesday at $287.99, to reach $2,600 a share before the end of the decade — making it the most valuable company on the planet. She and Ives both said 90% of future profits for Tesla will come from its fleet of self-driving “robotaxis,” including one planned for Austin, Texas, later this year,

Alphabet’s Waymo and Uber are already rolling out a joint effort to provide a similar service in Austin. But under Musk’s plans, Tesla owners who have paid for the company’s self-driving feature will be to rent out their cars to the service when they are not using it themselves, making the cars more valuable to them.

Tesla’s current self-driving offering still requires a person to be seated in the driver’s seat, ready to take control of the car. But the robotaxis won’t have a driver. And at last week’s meeting, Musk again promised the company’s Cybercab, which won’t even have a steering wheel or brake or accelerator pedals, will be in mass production by next year.

Broken promises and looming sales report

But Musk has been touting a robotaxi service for a better part of the last decade, and he’s yet to live up to those promises. Even he has admitted in the past that he was overly optimistic about its timeline.

If he is unable to follow through on the debut of his robotaxi service by the middle of the year, it could make the current rally for Tesla shares short-lived.

Shares could also be hammered from a weak sales report for the first quarter, which will be released next week. Morgan Stanley and JP Morgan are both forecasting an 8% or more drop in global sales in the first quarter compared to a year ago, in addition to a second straight year of reduced sales.

That could be in the range of the biggest drop in sales in the company’s history, nearly twice the drop during the early months of the pandemic, when factories and showrooms were closed due to stay-at-home orders. Continued weak sales and more stories about owners selling their cars could lead to a new slide in Tesla’s share price.

But Morgan Stanley analyst Adam Jonas still has a buy recommendation on the stock for the reason that Ives and Wood are so bullish: the belief that the sales weakness will be short-lived.

“In our view, Tesla’s softer auto deliveries are emblematic of a company in the transition from an automotive ‘pure play’ to a highly diversified play on AI and robotics,” he said in a note to clients.

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