Tesla (NASDAQ: TSLA) stock raced ahead by 7% through 10 a.m. ET Monday after Bloomberg reported that the incoming Trump administration wants to enact "a federal framework for fully self-driving vehicles."
CEO Elon Musk has repeatedly said that he considers artificial intelligence (AI) and autonomous driving technology the keys to Tesla's future growth. Investors are hoping that with government backing, this will turn into a winning bet.
What's driving Tesla stock higher
Tesla builds electric cars. Problem is, profit margins on electric cars have fallen as early adopters have made their purchases and demand elsewhere in the market has dwindled. Tesla's gross margin has fallen from better than 25% in 2021 and 2022 (roughly twice what Ford and GM were earning) to just over 18% in the past 12 months, according to data from S&P Global Market Intelligence. And with competition mounting as more and more companies field electric alternatives, it's unlikely Tesla's EV business alone will regain its former profit margins.
If Tesla succeeds in building an autonomous cars business, however, that would give the company a path to greater profitability, through software licensing and rental fees on fleets of new Cybercabs and Robovans.
Is regulation good news or bad news for Tesla?
Elon Musk was a major backer of Trump's presidential campaign, and investors seem to be assuming that support will translate into government regulation that favors Tesla. Musk has advocated for federal regulation in the past, rather than the current patchwork of state-by-state rules, and a framework for autonomous car operation would give Tesla a roadmap to follow at the same time that it imposes regulatory burdens on the industry. Larger, better-capitalized companies like Tesla would likely have an advantage over smaller start-ups in this scenario.
It remains to be seen, however, what form regulation will take, whether from the National Highway Traffic Safety Administration (over which Trump would have greater control) or laws passed by Congress (where the outcome would be less certain). For now, investors are best advised to wait and see what comes of this new policy proposal.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
