Tesla faces challenges while xAI could benefit from new bill

[UNITED STATES] President Donald Trump's proposed "Big Beautiful Bill" promises sweeping changes to federal spending, and it could have a profound effect on Elon Musk's empire. While companies like SpaceX and xAI stand to benefit, Tesla faces multiple challenges that could threaten its financial performance. Musk's vocal opposition to the bill highlights the sharp divide between his businesses’ future prospects and the potential setbacks from such legislative changes. Here’s a breakdown of what the bill could mean for Musk’s companies and why Tesla’s reliance on federal subsidies and regulations may soon come back to haunt it.

Impact on Tesla's Electric Vehicle Sales

Tesla's success has been heavily reliant on federal incentives like the electric vehicle (EV) tax credit. The proposed bill seeks to phase out these credits, directly impacting consumer purchasing power. For Tesla, which has already surpassed the 200,000-vehicle threshold for EV tax breaks, this could lead to a significant loss in sales.

Loss of Competitive Edge: The elimination of the $7,500 EV tax credit could erode Tesla's competitive advantage, especially as rival automakers offer similar or lower-priced EVs. According to Morningstar's Seth Goldstein, consumers will need more than just the brand value to justify paying a premium for Tesla’s vehicles.

Analyst Concerns: JPMorgan's Ryan Brinkman highlights that these policy changes could result in a $2 billion headwind for Tesla, jeopardizing more than half of its 2025 profits. Musk’s strategy to focus on autonomous vehicles and robotics might offer long-term gains, but Tesla is unlikely to see meaningful returns in the immediate future.

Threats to Tesla's Energy Business

Tesla’s push to revolutionize energy generation and storage with products like the Megapack and Powerwall is facing a new hurdle: the potential end of energy tax credits. With its energy business growing rapidly, the loss of these incentives could harm Tesla's ability to scale up its energy products and hurt its long-term growth plans.

Musk's Concerns: Musk himself voiced strong opposition, arguing that the removal of energy tax credits would threaten the nation’s energy independence. Analysts like Dan Ives also point out that Tesla's energy division could see a substantial setback if the bill's provisions are implemented.

Potential Shifts in Strategy: As the energy business faces a possible slowdown, Tesla may increasingly focus on other sectors, including AI and robotics. However, this pivot will require significant capital and time to yield returns.

Opportunity for xAI in AI Regulation

On the flip side, Musk’s AI-focused company, xAI, could stand to benefit from the bill’s provisions. The bill includes measures that would prevent local governments from regulating AI for the next decade, allowing Musk to push ahead with development without facing additional legal barriers.

Regulatory Freedom: By eliminating red tape, Musk would have the freedom to innovate faster with xAI, which could be instrumental in shaping the future of AI. The bill also allocates funding for modernizing the federal IT system with AI, potentially creating new opportunities for xAI to secure government contracts.

AI Contracts and Market Position: With federal resources set aside for AI-related cybersecurity and modernization projects, xAI could become a key player in providing solutions for government IT needs, further solidifying its position as a leader in AI development.

What We Think

The mixed impact of the "Big Beautiful Bill" on Musk’s businesses underscores a larger trend: Tesla’s dependence on government incentives is becoming increasingly precarious. While Tesla may face short-term sales declines and a loss of competitive advantage in the EV space, Musk’s ventures in AI and space technology are better positioned to thrive under the proposed changes. Ultimately, Tesla’s future will depend on how quickly it can pivot to new, less subsidy-dependent technologies, while xAI could emerge as a major beneficiary of deregulation. The true test will be whether Tesla can survive without the massive federal support that has propped it up for so long.