Why Tesla stock is beating the broader market today

Tesla TSLA shares climbed on Monday, outperforming a weaker broader market as investors looked past a sharp decline in SpaceX shares and continued to focus on the electric vehicle maker's longer-term artificial intelligence ambitions.

The stock rose around 2% in early trading, even as major indexes struggled for direction.

The S&P 500 fell 0.3%, while the Nasdaq Composite dropped 1.1%. The Dow Jones Industrial Average gained 167 points, or 0.3%.

Technology stocks broadly weighed on sentiment. Shares of Alphabet fell roughly 6% amid concerns over high-profile artificial intelligence talent departures, while Amazon and Meta Platforms lost 4% and 3%, respectively. Microsoft declined around 2%.

Meanwhile, newly listed SpaceX came under pressure, falling around 8% after dropping as much as 11% earlier in the session.

Analyst on Tesla stock

Despite the weakness in SpaceX, Tesla shares moved higher as investors continued to assess growing speculation about a potential merger between Elon Musk's two highest-profile companies.

In a research note published Friday, Jefferies said the merger narrative could increasingly influence how investors value Tesla.

The firm argued that expectations for a future combination between Tesla and SpaceX could cause Tesla shares to trade more like a tracking stock for SpaceX rather than reflecting the electric vehicle company's standalone fundamentals.

According to Jefferies, investors may be attracted to Tesla shares if they believe owning Tesla could provide exposure to a future merged entity without suffering significant dilution.

Examining the relationship between Tesla and SpaceX following SpaceX's blockbuster initial public offering, Jefferies noted that Tesla shares did not experience meaningful selling pressure ahead of the listing.

However, the firm warned that growing consensus around a potential merger could increasingly influence trading behavior.

"Consensus that a merger will be next and soon may turn TSLA into a tracker as shareholders try to minimize stake dilution," Jefferies wrote.

The brokerage maintained its Hold rating on Tesla while raising its price target to $375 from $350.

Jefferies argued that Tesla already trades largely on future expectations rather than current operating performance, with investors focusing on initiatives including Full Self-Driving software, robotaxi services and humanoid robotics.

The firm cautioned that a stronger merger narrative could further disconnect Tesla's valuation from its underlying financial results.

"If the merger narrative takes hold and TSLA effectively begins trading as a proxy for SpaceX's fortunes, its price discovery would become increasingly untethered from Tesla's own operating fundamentals," Jefferies said.

The firm described the current situation as one in which "Valuation & estimates remain disconnected."

Jefferies also adopted a more cautious stance toward Tesla's emerging businesses than many bullish investors.

The brokerage said its forecasts assume that early deployments of robotaxis and humanoid robots will initially generate losses rather than profits.

"Assuming launching robotaxis & humanoids will initially create loss centres," the firm wrote.

ARK Invest adds to Tesla position

While some analysts remain cautious, one of Tesla's most prominent supporters increased its exposure to the stock.

Cathie Wood's ARK Invest purchased 54,815 Tesla shares on Friday, according to disclosures.

The firm acquired 43,998 shares for its ARK Innovation ETF and another 10,817 shares for its ARK Next Generation Internet ETF.

Tesla remains ARK Innovation's largest holding, representing approximately 9.7% of the portfolio.

The stock is also the second-largest holding in the ARK Next Generation Internet ETF, accounting for roughly 7.9% of assets.

Wood has long been among Tesla's most bullish investors and has previously projected a price target of $2,600 for the stock by 2029.