Elon Musk Bet the Farm on Donald Trump. Will the Billionaire's Gamble Pay Off for Tesla Stock or Is a Pullback on the Horizon?

Elon Musk made a big bet on Donald Trump this year. He vocally supported him on his platform X (formerly Twitter), donated $119 million through a political action committee supporting Trump, and spoke at his rallies.

Now, Musk's gamble has seemingly paid off, and the billionaire is likely to share in the spoils. But the bigger question surrounds his company Tesla (NASDAQ: TSLA). The stock is up 23% since Trump's election victory. Will his presidency continue to benefit Tesla stock, or is a pullback on the horizon? Let's take a look.

How a Trump presidency might affect EVs

The interesting thing about Musk's endorsement of Trump is that it seemed to be working against Tesla on the surface. During the campaign, Trump discussed potentially eliminating a $7,500 tax credit for purchasing an electric vehicle (EV).

It's also no secret that Trump is looking to roll back a lot of the green initiatives President Joe Biden put into place, including a plan to build 500,000 EV charging stations by 2030. Building EV infrastructure at scale is key for the sector.

However, Tesla could benefit in several ways from a Trump presidency. The automaker has been losing its share of the EV market and saw its slice fall below 50% earlier this year. Eliminating the $7,500 tax credit may also serve as a barrier to entry for smaller competitors because it will cost more for consumers to purchase EVs, and these competitors likely don't have the scale yet to produce cars as affordably as Tesla.

Still, Trump's policies could further erode the entire EV market, which saw a decline in market share (slightly less than 8% of U.S. car sales) for the first time since the data has been tracked. Tesla may increase its market share, but it might be from a smaller pie, and for growth stocks like Tesla trading at huge valuations, the total addressable market (TAM) is crucial.

However, analysts also view a lighter regulatory environment under Trump as another positive. Tesla's self-driving initiatives have been met with regulatory roadblocks. Weeks after Tesla unveiled its robotaxis, the National Highway Traffic Safety Administration launched an investigation into the self-driving technology after several reported crashes.

Wedbush analyst Dan Ives views the incoming Trump administration as a "game changer" for Tesla. He values the autonomous driving opportunity at $1 trillion and believes "these key initiatives will now get fast-tracked as the federal regulatory spiderweb that Musk & Co. have encountered over the past few years around FSD (full self-driving)/autonomous clears significantly under a new Trump era."

Is a pullback coming?

A lot remains to be seen regarding which EV policies Trump will enact. I would expect the new administration to benefit Musk from a regulatory perspective.

That doesn't mean Tesla can completely avoid issues if its self-driving vehicles continue to have functional issues. Of course, if Tesla can correct its issues, it should have an easier time getting the green light from regulators.

As for the stock, Tesla now trades at 125 times forward earnings. That seems expensive for a company that could have a lower TAM in the future, but the autonomous driving opportunity is interesting and could be huge if Tesla can overcome regulatory issues.

I'm personally on the sidelines right now, but I think investors planning to sit on the stock for the next 10 years can continue to hold, since it is a giant in an industry with a bright future. However, be prepared for some near-term volatility, especially after such a big recent run.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.