Tesla's Political Risk Grows as Musk Launches "American Party" — But Analysts Say That's Not Its Biggest Problem

TradingKey - Tesla shares have taken a severe hit this week, plunging nearly 7% on Monday, July 7, and wiping more than $68 billion off the company’s market value in a single day. 

The selloff was triggered by CEO Elon Musk’s announcement of a new political venture — the founding of the so-called "American Party" — raising concerns that his deepening involvement in US politics could further distract him from his duties at Tesla.

Investors worry that Musk’s political ambitions are pulling focus away from his role at the electric-vehicle maker, just as the company faces growing operational and regulatory headwinds. 

William Blair downgraded Tesla stock from “Outperform” to “Market Perform,” citing both the political controversy surrounding Musk and upcoming policy changes that could hurt Tesla’s electric vehicle (EV) sales.

James Fishback, CEO of hedge fund Azoria Partners, delayed the launch of the Azoria Tesla Convexity ETF — a fund designed to trade Tesla shares and options — saying Musk had “gone too far” with his political activism.

Yet according to some analysts, the stock’s recent drop reflects deeper structural problems that go beyond Musk’s public persona.

Weak Demand, Aging Models

Tesla’s delivery figures are underwhelming. The EV maker delivered 1.78 million vehicles globally in 2024, slightly down from 1.80 million in 2023 — marking Tesla’s first-ever year-over-year decline. The second quarter was particularly soft, with only 384,122 vehicles delivered, a 13.5% drop from the same period last year.

Stephanie Valdez Streaty, Director of Industry Insights at Cox Automotive, attributes the slump to aging vehicle models and growing consumer fatigue in the US market. 

Meanwhile, Deutsche Bank analyst Edison Yu noted that the long-anticipated budget EV — the Model Q — is still far from launch, leaving Tesla exposed in the lower-end segment.

Carbon Credit Profits at Risk

Tesla’s troubles don’t stop at soft vehicle demand. Regulatory shifts are threatening one of its most lucrative revenue streams — the sale of emissions credits.

Under new US legislation, the $7,500 federal EV tax credit will be eliminated starting September 30, 2025. This could erode Tesla’s pricing advantage, especially as competition intensifies in the EV space.

More significantly, changes to the Corporate Average Fuel Economy (CAFE) standards could devastate Tesla’s carbon credit revenue. In 2024, Tesla generated $2.8 billion from selling emissions credits, accounting for 39% of its annual net profit. The CAFE system penalizes automakers that fail to meet fuel-efficiency targets and rewards those producing zero-emission vehicles with tradable credits.

William Blair analyst Jed Dorsheimer estimates that 75% of Tesla’s regulatory credit income is tied to CAFE rules. But under the newly passed tax bill, penalties for failing to meet fuel economy standards will be reduced to zero — effectively removing any incentive for legacy automakers to buy credits from Tesla.

A former Tesla executive warned this change could have a devastating impact on the company’s profitability.

Tesla finds itself at a critical juncture. While Musk’s political ambitions dominate the headlines, the company’s core business challenges — from flagging demand to pivotal regulatory changes — may pose even greater long-term risks. As the company navigates this turbulent phase, investors should closely watch how Tesla adapts to preserve its market leadership and restore investor confidence.