The social media feud between Elon Musk and Donald Trump has pushed Tesla into a vortex of financial, regulatory, and reputational risks, and made its stock suffer. The clash, which began with Musk’s criticism of a US president-backed spending bill and Trump’s retaliatory threats, has erased over $150 billion from Tesla’s market value in a single day.
It also highlighted how important Musk’s comments and his behavior are for Tesla’s stock price. Although Musk subsequently suggested he was open to making amends, the tensions are seen as a significant headwind for Tesla shares.
On June 5th, at the conflict’s debut, Tesla stock plunged 14%, creating the largest single-day drop in Tesla’s history. This reflects investor panic over the perceived sudden erosion of government support and the broader political risks this dispute might bring for the company. While shares partially rebounded as tensions briefly cooled, Tesla’s stock is down nearly 24% year-to-date, the largest drop for any of the “Magnificent 7” stocks.
Central to the sell-off is Trump’s threat to terminate federal contracts and subsidies critical to Tesla’s operations. The proposed elimination of the $7,500 electric vehicle (EV) tax credit included in Trump’s proposed budget law, which drew protests from Musk (although he said Tesla did not need the subsidies), might force Tesla to either absorb the costs or raise prices, further straining its already narrowing profit margins and affecting sales. If we look at the latest earnings report, in Q1, regulatory credits were 0.6 billion dollars while Tesla showed an operating profit of 0.4 billion dollars.
The vanishing of these credits for EVs might push Tesla into loss territory. A note from JPMorgan to clients estimates the loss of the EV tax credit could cost Tesla $1.2 billion a year and the loss of regulatory credit sales (carbon credits) another $2 billion.
The feud also brings regulatory risks. Tesla’s ambitious autonomous vehicle plans, including its robotaxi initiative, require federal approvals that now may face heightened scrutiny, especially as the robotaxi is completely different from any other autonomous vehicle. Tesla’s robotaxi does not have a steering wheel in the car nor lidar, using only the car’s cameras. Analysts warn that Musk’s diminished political capital could delay key clearances, particularly as Republicans, aligned with Trump, target policies that were favoring EV adoption.
Moreover, yesterday, Argus Research and Baird – two financial advice companies – downgraded Tesla stock, citing growing market uncertainty and reputational risks tied to Elon Musk’s deteriorating relationship with Trump. Both firms shifted to Neutral ratings, in line with Wall Street’s broader consensus.
Investor confidence has been rattled by Elon Musk’s perceived unpredictability, though after the initial drop following the feud the stock rebounded a bit. Elon Musk’s public statements, particularly on social media platforms like Twitter (now X), have repeatedly demonstrated their capacity to influence Tesla’s stock price, often with immediate and significant market reactions.
In August 2018, Musk tweeted, “Am considering taking Tesla private at $420. Funding secured,” causing Tesla’s stock to surge by over 10% in a single day. On May 1, 2020, Musk tweeted, “Tesla stock price is too high, IMO,” triggering an 8% intraday drop and erasing $13 billion from Tesla’s market capitalization. In February 2021, Tesla announced a $1.5 billion Bitcoin investment and plans to accept the cryptocurrency as payment, causing Bitcoin’s price to surge by 20% and Tesla’s stock to rise 2%. However, by May 2021, Musk reversed course, citing environmental concerns over Bitcoin mining, which led to a 5% drop in Tesla’s stock and a 15% decline in Bitcoin’s value.
A 2023 empirical study from Luiss University found that Tesla-related tweets with positive sentiment generated statistically significant cumulative abnormal returns, while neutral or negative tweets had less impact. But the current situation also shows how important it is for a company that its CEO considers all implications of his behavior and communication.
While the Musk-Trump feud looks to diminish in intensity, investors are wondering how this will end. Tesla is the second most held stock by Romanian and global investors on the trading and investing platform eToro. A truce could stabilize the share price, but the threats of subsidy cuts, regulatory retaliation, and consumer backlash suggest that Tesla has a bumpy road ahead. And this adds to the previous issues that the company is having with increased competition from the Chinese manufacturers and diminishing margins. Steering clear of further troubles as it navigates the political minefield is critical for Tesla.
