The technological advances that have taken place over the past couple of decades have had a dramatic impact on the world we live in. There has also been a noticeable shift in the stock market -- and the evidence is undeniable.
Just 20 years ago, household names like General Electric(NYSE: GE) and ExxonMobile(NYSE: XOM) were the most valuable companies in the world, measured by market cap, worth $319 billion and $283 billion, respectively. Now, technology issues lead the list.
To be clear, the $1 trillion club is still fairly elite, with just eight U.S. companies making the cut (as of this writing). They include Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. But this exclusive fraternity just added its newest member.
In the wake of the U.S. presidential election, Tesla(NASDAQ: TSLA) stock surged to levels not seen in more than two years, bringing its market cap above the $1 trillion threshold. It's worth noting that Tesla first hit a trillion-dollar valuation in late 2021 but ceded its membership during the downturn only to come roaring back and retake its place among the world's most valuable companies.
However, some on Wall Street believe the electric vehicle (EV) maker is just getting started. Let's look at recent challenges, what could drive Tesla stock even higher in the coming years, and why Wall Street is still bullish.
Image source: Getty Images.
A challenging environment
To be clear, some investors have been decidedly bearish on Tesla over the past couple of years, a sentiment that's understandable. The biggest headwind was the economic downturn and the decades-high inflation that came with it. The Federal Reserve Bank took the appropriate steps to rein in surging inflation, namely by raising interest rates. This results in higher borrowing costs, which, over time, tends to slow overheated prices and lower inflation.
This was a double whammy for Tesla. During a difficult economy, consumers tend to put off big purchases, such as buying a car. Furthermore, even the least expensive Tesla EV is, on average, more expensive than its gas-powered counterparts. So, while some consumers put off buying a car altogether, others were trading down to lower-priced options.
Then, there's the matter of financing. Interest rates ultimately increased to a 23-year high, which discouraged borrowers from taking out car loans, putting Tesla models out of reach for large swaths of the population. However, after a couple years of uncertainty, it appears the carmaker has finally turned the corner.
In the third quarter, Tesla's total revenue of $25 billion climbed 8% year over year, while operating income jumped 54%. The company's focus on cutting production costs is bearing fruit, dropping more profits to the bottom line. Add to that the improving economy and the Fed's decision to begin cutting interest rates, and you have all the elements in place for the long-awaited Tesla rebound.
Wall Street is bullish
Tesla has been on a noteworthy rally over the past several weeks, with the stock price up 32% over the past month (as of this writing). Despite its epic run, some on Wall Street are still remarkably bullish.
Chief among them is Bank of America analyst John Murphy, who maintains a buy rating on the stock and just increased his price target to a Street-high $350 per share. That represents potential upside of 18% for investors compared to Wednesday's closing price.
The analyst believes the company will benefit from policy changes under the Trump Administration. Those could include revising regulations for Tesla's full self-driving (FSD) feature and imposing tariffs on imports President-Elect Trump promised on the campaign trail.
Wedbush analyst Dan Ives has an outperform (buy) rating and a $300 price target on Tesla and echoed some of the same points. "The biggest winner from a Trump White House remains Tesla," Ives wrote. The analyst suggested that "Trump could accelerate some of the FSD and autonomous initiatives for Tesla starting in 2025."
Ives has previously noted that while there could be an end to EV rebates and tax incentives, that could ultimately be a positive development for Tesla. The analyst noted, "Tesla has the scale and scope that is unmatched in the EV industry, and this dynamic gives ... Tesla a clear competitive advantage in a non-EV subsidy environment." Ives also suggested that tariffs on Chinese imports could make these cheaper EVs less competitive.
It's also worth noting the vast potential that exists from the upcoming launch of Tesla's Cybercab robotaxi. While the vehicle is still in development, it could upend the industry as we know it. At a recent product event to introduce the prototype, CEO Elon Musk noted that the streamlined design and production improvements paved the way for cost-effective manufacturing of the Cybercab at scale. The company believes the robotaxi could be in production "before 2027."
If Musk's plans come to fruition -- and that's a big if -- they could be a game-changer for Tesla. Cathie Wood of Ark Invest has a price target of $2,600 on Tesla stock, though it hinges on the release and ultimate success of the Cybercab. That represents potential upside for investors of 775%, though some view that potential future as a longshot.
I'd be remiss if I didn't address that matter of the stock's valuation. Tesla's post-election spike has it trading at roughly 119 times forward earnings and 8 times forward sales, so investor concerns about its price tag are understandable.
For those who already own Tesla stock, bravo! Hang on to those shares. For those who don't, Tesla has proven time and again how volatile it is, allowing astute investors to own the stock at a much more reasonable valuation. As recently as April, investors could have picked up shares for half their current price.
To justify its current valuation, shareholders have to believe that Tesla will continue to sell more EVs, continue to cut production costs, capitalize on its foray into artificial intelligence, and eventually deliver on its robotaxi promises. That's clearly a tall order, but if it comes to pass, today's valuation could look cheap by comparison.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bank of America is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Bank of America, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
