Potential Impact of Trump's Tariffs on Tesla's Stock: Insights from Previous Economic Actions
In a surprising twist, President Donald Trump slapped tariffs on goods from Canada, Mexico, and China, effective February 1. With these recently imposed duties, it's unclear how businesses will adapt, but it's safe to say significant changes in supply chain logistics, manufacturing decisions, and raw material sourcing are upon us.
One business that could find itself in hot water is none other than the electric vehicle titan Tesla (TSLA -0.08%). With operations spanning the three countries under the tariff gun, let's delve into how these new policies might affect ol' Musk's baby.
Tariffs: A one-two punch for Tesla?
Tariffs work like taxes on imported or exported goods, often acting as a geopolitical pawn in trading negotiations. For businesses, these taxes mean higher costs for foreign materials, which can directly impact profitability and growth.
The silk-road of Tesla's supply network extends to Mexico, where roughly 25% of its materials hail from. This unfortunate geographical arrangement could drive up production costs, potentially shrinking Tesla's slender profit margins or, alternatively, lead to pricing hikes for consumers. Neither option bodes well for Tesla's growth prospects.
But let's not lose hope just yet. Tesla might just circumnavigate these new tariff yards.
Skipping the rough seas: How Tesla could counteract tariffs
During Tesla's Q4 earnings call, the company's CFO, Vaibhav Taneja, acknowledged the uncertainty surrounding these new tariff policies. After all, Tesla is one of the world's fastest-growing automakers and has spent billions on capital expenditures, constructing factories far and wide.
In its annual filing for January, Tesla highlighted its manufacturing facilities in China and Germany, which aid in reducing transportation and manufacturing costs while bypassing unfavorable tariffs. The firm also plans to set up shop in Mexico. This strategic positioning could help Tesla dodge some of the tariff-induced damages.
So how did Tesla fare during Trump's previous stint in the Oval Office, when tariffs weren't a figment of our collective imagination?
Tesla in Trump's first term: Waves and triumphs
From 2017 to 2021, Trump imposed tariffs on goods from China, Europe, Mexico, and Canada. Tesla, with its fingers in many global pies, felt the tariff bite. Below are Tesla's revenue, operating expenses, and profitability charts during this period.
TSLA Revenue (Quarterly) by YCharts
Although operating expenses began to pick up around 2018, Tesla managed to stay afloat, as demonstrated by the downward slope of costs during late 2018 and 2019. However, expenses skyrocketed in 2020, shortly after the period marked by the COVID-19 recession. This is an important observation. The recession wreaked havoc on supply chain logistics and good prices.
These operating results demonstrate that Tesla actually managed to hold its ground during Trump's first term, with sales continuing their upward march and cost controls staying tight. Free cash flow remained somewhat uneven but trended positively considering the circumstances.
As for Tesla stock performance during Trump's first term?
TSLA by YCharts
Historical trends suggest that Tesla stock displays remarkable resilience, but it's crucial to consider how the company might respond to this new batch of tariffs and their potential impact on investors in the short and long terms.
In my humble opinion, the trends above back Tesla's decision to invest in facilities abroad in pursuit of stronger unit economics across major demographic zones. I wouldn't be surprised if Tesla uses the latest round of tariffs as motivation to further accelerate its plans to build a factory in Mexico.
The short term might bring some turbulence, but I'm cautiously optimistic that Tesla will prevail by leaning on its networks in China, Europe, and perhaps Mexico to sidestep some cost risks and continue growing over the next four years, emerging even stronger in the long run.
- The recent tariffs imposed by President Donald Trump on goods from Canada, Mexico, and China could potentially increase costs for Tesla, as approximately 25% of its materials come from Mexico.
- In an attempt to counteract the effects of tariffs, Tesla has been strategically positioning its manufacturing facilities in China, Germany, and, planned for the future, Mexico.
- During President Trump's previous term, Tesla experienced increases in operating expenses, but manageed to maintain sales growth and tight cost controls.
- With the new round of tariffs, it is possible that Tesla may accelerate its plans to build a factory in Mexico, utilizing its existing networks in other regions to mitigate cost risks and continue growing over the next four years.
