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

On Feb. 1, President Donald Trump imposed a series of tariffs on goods imported from Canada, Mexico, and China.

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Given how new these policies are -- some of the tariffs were put on hold before they went into effect -- it's difficult to predict how businesses will respond. But major changes to supply chain logistics, manufacturing decisions, and vendor sourcing for raw materials are likely.

One company that could be particularly vulnerable to tariff policies and their effect on trade negotiations is Tesla (NASDAQ: TSLA) -- as the company operates in all three countries affected.

Let's explore how tariffs could influence Tesla's operations and how the company might react.

How could tariffs affect Tesla?

Tariffs are taxes on imported or exported goods, often used by governments as leverage in trade relations. They can make businesses pay more for materials from overseas. The higher costs can directly affect a company's growth and hurt profitability.

For Tesla specifically, information from the Department of Transportation indicates that the company imports roughly 25% of its materials from Mexico.

On the surface, the Trump tariffs look like a disaster for Tesla, as they could lead directly to higher vehicle production costs. On one hand, this could lead to shrinking profit margins for the company. On the other, Tesla could pass these costs on to vehicle buyers in the form of price hikes. In either scenario, Tesla's growth prospects face a bumpy road. But Tesla may be able to work around these new trade policies.

Image source: Getty Images.

How can Tesla possibly navigate the tariff environment?

During Tesla's fourth-quarter earnings call in January, the company's CFO, Vaibhav Taneja, said that the uncertainty brought by new tariff policies "will have an impact on our business and profitability."

Keep in mind that Tesla is one of the fastest-growing automakers in the world and has spent billions in capital expenditures (capex) to construct factories across the globe.

In the company's annual filing from January, Tesla notes that it has "manufacturing facilities in China and Germany, which allows us to increase the affordability of our vehicles for customers in local markets by reducing transportation and manufacturing costs and eliminating the impact of unfavorable tariffs."

Tesla is also planning to build a factory in Mexico.

So Tesla might be able to avoid some of the damage tariffs could have on its business. How did that work out last time Trump occupied the Oval Office? He imposed tariffs then, too.

Tesla's business during Trump's first term

During his first term, from 2017 to 2021, Trump imposed tariffs on good from China, Europe, Mexico, and Canada.

In the charts below, you can see Tesla's revenue, operating expenses, and profitability during that time.

TSLA Revenue (Quarterly) data by YCharts

While Tesla's operating expenses (the middle graph) started to tick up around 2018, the company managed to work through this -- as indicated by the downward slope in the latter half of 2018 and through 2019. Then the company's expense profile rose markedly throughout 2020, shortly after the period marked by the gray-shaded column. This is a really important point. The gray column denotes the COVID-19 recession. As a refresher, the peak days of the pandemic really did a number on supply chain logistics and the prices of goods.

The operating results above illustrate that Tesla's business actually managed to perform just fine during Trump's first term. For the most part, sales continued to grow while the company operated under much tighter cost controls. Free cash flow -- though it was somewhat lumpy -- trended upward overall.

With that said, how did Tesla stock perform during Trump's first stint in the Oval Office?

As seen in the chart below, shares of Tesla soared by more than 1,600% between 2017 and 2021. The only noticeable dip occurred in early 2020 -- again, a period marked by the onset of the pandemic. However, Tesla stock rebounded strongly throughout the latter months of 2020 as sales and profits began to accelerate.

TSLA data by YCharts

While history suggests that Tesla stock tends to demonstrate high levels of resiliency, it's important to consider how the company may respond to this round of tariffs and what it could mean for investors in the short and long terms.

I think the trends explored above validate Tesla's decision to invest in factories in other countries in an effort to command even stronger unit economics across major geographic demographics. I wouldn't be surprised if Tesla responds to the most recent round of tariffs by accelerating its ambitions to build the factory in Mexico.

While the short term will likely come with some pronounced volatility, I'm cautiously optimistic that the company will be able to rely on its networks in China, Europe, and possibly Mexico to mitigate some cost risks and continue to grow over the next four years and come out stronger in the long run.

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Adam Spatacco has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.