Could President Trump's Tariffs Rattle Tesla Stock? Here's What History Suggests.

Recently, President Donald Trump enacted a series of tariffs affecting goods imported from Canada, Mexico, and China, although some of these tariffs are currently on hold.

On February 1, President Trump introduced tariffs that apply to imports from these nations.

As these policies are still new and some tariffs have yet to take full effect, predicting business responses is challenging. However, significant adjustments to supply chain management, manufacturing practices, and the sourcing of raw materials are anticipated.

Tesla (NASDAQ: TSLA), in particular, may be significantly impacted by these tariff measures, as its operations span all three affected countries.

How could tariffs affect Tesla?

Tariffs are essentially taxes levied on imported or exported goods, often used as tools in trade negotiations. These taxes can drive up business costs, especially for materials sourced internationally. This can have a direct impact on a company's profitability and growth.

Specifically, data from the Department of Transportation reveals that Tesla imports approximately 25% of its materials from Mexico.

At first glance, the tariffs imposed by Trump may seem unfavorable for Tesla, potentially leading to increased vehicle production costs. This scenario could reduce profit margins. On the flip side, Tesla could opt to pass these additional costs onto consumers through higher prices. Either path presents a rocky road ahead for Tesla's growth prospects. Nevertheless, the company might find ways to adjust and navigate these new trade challenges.

How can Tesla possibly navigate the tariff environment?

During Tesla's earnings call for the fourth quarter in January, the company's CFO, Vaibhav Taneja, acknowledged the uncertainty presented by the new tariffs, noting that it would affect both business and profitability.

Tesla stands out as one of the world’s fastest-growing car manufacturers, having invested billions in building factories around the globe.

In its annual filing from January, Tesla indicated that it operates manufacturing facilities in China and Germany. This allows the company to enhance the affordability of its vehicles in local markets by lowering transportation and manufacturing costs, as well as mitigating the impact of unfavorable tariffs.

Furthermore, Tesla is planning to establish a factory in Mexico.

As such, Tesla may manage to alleviate some of the adverse effects that these tariffs could impose on its business. Let's consider how Tesla fared during previous tariff policies enacted by Trump.

Tesla's business during Trump's first term

During Trump's first term from 2017 to 2021, tariffs were imposed on goods from China, Europe, Mexico, and Canada.

To understand Tesla's performance during that time, one can observe its revenue, operating expenses, and profitability from various charts.

While Tesla's operating expenses began to climb around 2018, the company managed to adapt, as indicated by a decrease in expenses in the latter half of 2018 through 2019. Operating costs escalated noticeably in 2020, particularly during the gray-shaded area that represents the COVID-19 recession. This period significantly affected global supply chains and commodity prices.

The results suggest that Tesla maintained a strong performance throughout Trump’s first term; sales generally increased even as the company enforced tighter controls on costs. Free cash flow, while variable, showed a steady upward trend overall.

The question arises: How did Tesla's stock perform during this time?

As illustrated in the accompanying charts, Tesla shares skyrocketed by over 1,600% from 2017 to 2021. The only significant dip occurred at the beginning of 2020, coinciding with the onset of the pandemic. However, Tesla's stock rebounded robustly in the latter end of 2020 as sales and profits surged.

While history indicates that Tesla stock typically demonstrates considerable resilience, it is vital to contemplate how the company might address the current tariffs and what implications this may have for investors in both the short and long term.

The trends discussed highlight Tesla's strategic choice to invest in international manufacturing facilities to enhance its market presence across different regions. It would not be surprising if Tesla intensifies its efforts to expedite the construction of its factory in Mexico in response to the latest tariffs.

Although the short term may be filled with volatility, there is cautious optimism that Tesla will leverage its connections in China, Europe, and potentially Mexico to manage costs effectively and continue its growth trajectory over the next few years.

tariffs, Tesla, stock