Elon Musk's Tesla and SpaceX Lost More Than $420 Billion in Combined Market Value in Two Days After Democrats Swept the Midterms, With Investors Fearing New Congressional Probes. Here's Why That Political Risk Matters for Shareholders

Elon Musk-led publicly traded corporations, Tesla (NASDAQ:TSLA) and Space Exploration Technologies (NASDAQ:SPCX), remain volatile. In the days following the U.S. midterm election, they shed a combined $420 billion in market value. Both companies recovered most of these losses and are now back around their pre-election levels, but this recent episode highlighted the extent to which Tesla and SpaceX are exposed to political risk. It's worth digging deeper into it and discussing the potential implications for investors considering either stock.

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Will the government crack down on Tesla and SpaceX?

Tesla and SpaceX's prospects largely hinge on their artificial intelligence (AI)-related investments. Consider first the case of Tesla. The company's Optimus robot and especially its robotaxi ambitions are the reason the stock continues to command high earnings multiples, despite a mixed (at best) performance from its core electric vehicle (EV) business over the past two years.

Tesla needs considerable computing capacity to train AI models behind its Full Self-Driving (FSD) software and its Optimus humanoid robot. That's why the recent election results could create a problem for the company, as voters elected officials who ran on limiting data center expansion.

But that's just one of the many issues it could face. Several other aspects of Tesla's business could come under regulatory scrutiny, potentially triggering congressional probes. Tesla's recent launch of the Cybercab, which attracted scrutiny from regulators as soon as it hit the road, could once again come under investigation. If it does, it would be a blow to one of Tesla’s most promising business ventures, potentially forcing the market to adjust its expectations accordingly.

Musk's other business, SpaceX, is perhaps even more exposed to regulatory risk and to the threat posed by the recent election to the AI industry.

SpaceX is looking to significantly increase computing capacity next year to meet strong demand for its AI services. These plans might not go as the company expects if regulators and lawmakers crack down on data center expansion. Further, some lawmakers recently looked into investigating whether SpaceX restricted Ukrainian military access to its Starlink and Starshield satellite services and whether the U.S. military has become too dependent on the company.

SpaceX is likely safe from this investigation, at least for now. But in the future, SpaceX’s revenue from contracts with U.S. federal agencies could be reduced if lawmakers find that the government is too dependent on the company.

Finally, a proposed merger between SpaceX and Tesla would certainly attract even more attention from regulators now. There is no guarantee the two companies will go that route, although their boards of directors have formed special committees to investigate whether it makes sense. If they do decide to merge, though, expect significant regulatory pushback.

What this means for investors

Shares of SpaceX and Tesla are hardly cheap. The former trades at 48.4x forward earnings, while the latter trades at 159.5x forward earnings. On the one hand, there is a reason the market is bullish on these stocks, as both appear to have excellent prospects. SpaceX has already revolutionized space travel and continues to innovate, notably with its next-gen rocket, Starship, which is designed to be fully reusable and could further cut space launch costs.

The company is also posting excellent financial results, especially within its AI segment, called Super Intelligence. SpaceX has plenty of growth opportunities ahead and is now profitable, which makes it a more attractive stock to invest in. Meanwhile, Tesla's robotaxi service, if it achieves significant scale and utilization, could make the business much more profitable.

So could the Optimus robot, although that project is arguably more of a long shot. That said, recent developments highlight just how exposed both corporations are to political and regulatory risk. Investors should factor that in before buying their shares. And at current levels, it might not be worth it, in my view. I'd certainly consider investing in Tesla and SpaceX at the right price.

But their current share prices arguably already factor in significant success from their most promising projects and leave little -- if any -- margin of error, something investors need a healthy dose of with these companies, considering the potential impact of regulatory (and other) headwinds on their businesses. I'd revisit my position if both stocks fall significantly, perhaps by 20% or more from current levels. Until then, I am staying on the sidelines.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Space Exploration Technologies and Tesla. The Motley Fool has a disclosure policy.