CEO Elon Musk has brought huge profits to this auto manufacturer. Now, Tesla (TSLA.O) needs to catch up with its high stock price fundamentals.

Elon Musk created a perfect hedge for Tesla's stock by supporting Donald Trump.

Elected President Trump is not a supporter of electric cars. He has stated that electric cars pose a risk to the American auto industry and has promised to cancel electric vehicle purchase tax credits and require auto manufacturers to produce battery-powered vehicles under a 'mandate'. The potential impact is evident in the market: the day after the election, Lucid Group (LCID.O) fell by 5.3%, Polestar Automotive Holding dropped by 8.2%, and Rivian Automotive fell by 8.3%. Considering that these changes may indicate a decrease in sales for these electric car startups in the USA, these stock price trends are reasonable.

Tesla is an exception. Its stock price rose by 14.8% on Wednesday, increasing its market cap by $119 billion, second only to Nvidia, which is four times its value.

Such an increase is not inevitable. However, after the unsuccessful assassination attempt in July this year, Musk maintained a close relationship with Trump and spent around $0.13 billion to help him win the election, which favored Tesla. While there is no reason to doubt the sincerity of Tesla's CEO, if Tesla were to drop by 8% like Rivian (RIVN.O), it would lose $66 billion in market cap, resulting in a daily market cap fluctuation of up to $185 billion - 1400 times the amount Musk donated. The day after the election, Musk's net worth increased by about $25 billion.

Clearly, the market believes Musk has bought a lot of 'protection' for Tesla stocks.

"Musk has made a historic gamble," said Wedbush analyst Dan Ives. He rates Tesla's stock as a 'buy' with a target price of $300, just 1% higher than the Thursday's closing of $296.91.

Currently, the company's fundamentals need to catch up with its stock price.

As of the Thursday close, Tesla's stock was trading at 93.8 times the expected earnings for 12 months, the highest since April 5, 2022, when electric vehicle deliveries increased by 40% year-on-year. Although Musk believes growth will resume by 2025, deliveries are not expected to increase in 2024. This is also much higher than its three-year average of 62.9 times.

This is an expensive valuation. Barron's estimates that based on the expected growth over the next decade, Tesla's automotive and energy storage business is worth about $200 per share. Paying a higher price requires faster earnings growth for Tesla. Accelerated growth may come from better car sales (Tesla is expected to launch a low-cost model in early 2025) or new artificial intelligence revenue (Tesla plans to introduce an AI-trained self-driving taxi fleet by the end of 2025).

Alternatively, this could also be a bet on potential benefits from the relationship between Musk and Trump. In his victory speech, Trump specifically praised Musk, mentioning SpaceX's successful mid-air rocket catch event last month, and credited Musk with saving lives with Starlink's space Wi-Fi service when Hurricane Helena hit North Carolina at the end of September.

"Let me tell you, we have a new star. A star is born - Elon," Trump said, "[Musk] is a very special person, he is a super genius. We must protect our geniuses - we do not have many geniuses like him."

The two even discussed Musk's possible role in the second Trump administration, as Musk is studying ways to reduce government waste and inefficiency. Musk jokingly referred to it in his usual style as the "Department of Government Efficiency" (DOGE). Investors may typically be concerned about Musk's spreading himself too thin. After all, he runs multiple companies, even becoming a top player in the Diablo game series in his spare time.

However, investors seem to have gotten used to Musk's multitasking - they may have already priced in the potential for cooperation with Trump. With Trump in office, Musk and his car company may face less scrutiny from the U.S. Securities and Exchange Commission and the Department of Justice, which are currently investigating Tesla's driver-assist technology and other issues. If Musk is in charge of reducing government spending, he may target the National Labor Relations Board to weaken the power of unions, even if Tesla's American employees are not represented by a union.

But more likely, investors are starting to price in better fundamentals. While the elimination of electric vehicle tax credits will hurt the entire industry, Wade Bush's Ivers believes Tesla has the scale to remain profitable without tax breaks - just as in the past. Fewer government incentives also mean reduced competition from traditional auto manufacturers, increasing Tesla's market share. Overall, these changes could put the per share value between $40 and $50, Ivers stated.

Bank of America securities analyst John Murphy is more optimistic. He wrote that Tesla's new electric vehicle policy for the second Trump administration is 'indifferent' and may benefit from less regulation involving autonomous driving cars. On Thursday, he raised the target price by $85 to $350 per share, the highest target price tracked by FactSet among major brokerage firms. Murphy's target values Tesla at about $1.1 trillion, equivalent to 106 times FactSet's consolidated 2025 profit expectations.

This target may prove to be too conservative. Tesla's recent upward trend has pushed its stock price above recent resistance levels—Technical analysisUsed to describe the levels at which investors have recently bought and sold stocks in stock charts. CappThesis founder Frank Cappelleri said the stock now has a 'bullish chart pattern.' If the stock price can stay above $270 in the next few days, he believes it could reach $400 in the coming months, 35% higher than Thursday's closing price, close to an all-time high.

Perhaps investors are ahead of the curve, but the market may be sensing certain trends. Regardless, for Tesla's stock to maintain its recent momentum in 2025 and beyond, profit growth must accelerate—no matter who is in the White House.