Investing.com -- Shares of SpaceX and Tesla fell Wednesday as Democrats’ strong showing in the US midterm elections raised fresh questions about Elon Musk’s political influence and the regulatory future of his sprawling business empire.

SpaceX shares dropped about 5%, while Tesla declined 5.6%, as investors weighed the possibility of increased scrutiny of Musk’s companies and complications for a potential combination of the rocket maker and electric-vehicle manufacturer.

The declines came despite a markedly more optimistic assessment of SpaceX from Morgan Stanley. Analyst Adam Jonas has sharply increased his financial forecasts for the company, arguing that its improving earnings outlook is not yet fully reflected in its valuation.

The election results present a new complication for Musk, who has closely aligned himself with President Donald Trump and reportedly contributed nearly $450 million to Republican political causes. Democrats’ gains could strengthen their ability to scrutinize Musk’s business activities, particularly as his companies expand into artificial intelligence and defense-related infrastructure.

SpaceX is especially exposed to Washington’s decisions. The company generates billions of dollars from government contracts, while its Starlink satellite network has become strategically important in military and geopolitical affairs. Greater congressional scrutiny could also complicate the regulatory environment for its expanding AI operations.

Barclays analysts flagged potential implications for the AI infrastructure buildout in Texas, where SpaceX and Tesla have major operations. Governor-elect Gina Hinojosa campaigned on a moratorium on new data-center construction until the state legislature can establish additional requirements. Her proposed conditions include union labor, greater community input and transparency, protections for local water and electricity supplies, and requirements that data-center operators cover their own infrastructure costs rather than passing them on to taxpayers and households. The proposals could introduce another layer of uncertainty for companies planning large-scale computing investments in the state, particularly as demand for AI infrastructure accelerates.

Tesla faces a different but related risk. Its recent rally has been supported partly by investor enthusiasm for Musk’s AI ambitions and speculation about a possible combination with SpaceX.

Tesla shares have climbed 34% since their late-July lows, helped by expectations surrounding autonomous driving, robotics and the prospect of bringing Musk’s businesses closer together. A merger could combine Tesla’s vehicle, robotics and AI operations with SpaceX’s launch capabilities, satellite network and computing infrastructure.

But the transaction remains exploratory, and a more hostile political environment could make regulatory approval more difficult. Bloomberg has reported that there has been an effort to announce a deal in the first half of next year, potentially allowing it to close while Trump remains in office.

Even without the merger, the election outcome introduces another source of uncertainty for investors who have increasingly valued Musk’s companies around expectations of future AI growth.

Morgan Stanley raises SpaceX forecasts The political concerns stand in contrast to Morgan Stanley’s increasingly bullish financial outlook for SpaceX.

In a research update, Jonas said the bank had nearly doubled its 2027 revenue and operating income estimates in less than four months since initiating coverage. It has also brought forward its forecast for free-cash-flow breakeven by four years and reduced its projected borrowing requirements by roughly $280 billion.

Morgan Stanley now expects SpaceX to generate $175 billion in revenue in 2027 and $289 billion in 2028, increases of 93% and 84%, respectively, from its previous forecasts. Its 2028 operating income estimate has risen 72% to $119 billion.

The bank now expects the company to turn free-cash-flow positive in 2031, compared with its previous forecast of 2035. Its estimate of cumulative external borrowing has fallen from $670 billion to approximately $390 billion.

Jonas pointed to growth across SpaceX’s businesses, including satellite connectivity, launch services and artificial intelligence, as supporting the improved outlook.

He also identified the next Starship flight, expected this month, as a potentially important catalyst. SpaceX plans to attempt to catch both the spacecraft and its Super Heavy booster after launch, a major test of the company’s ambitions to make the system fully reusable.

Musk has said the attempt is more likely than not to succeed, according to Jonas. A successful demonstration could improve the economics of launching satellites and expand the potential applications for Starship.

A valuation argument built around AI Morgan Stanley’s bullish case also rests on the argument that investors are undervaluing SpaceX’s AI business.

At a share price of roughly $140 and a market capitalization of $1.91 trillion, Jonas calculates that SpaceX trades at 17.6 times projected 2028 adjusted earnings. That is slightly below the bank’s 17.7 times estimate for the S&P 500.

Morgan Stanley forecasts earnings growth of roughly 150% annually between 2026 and 2030 and has set a $300 price target, implying potential upside of about 114% from the $140 reference price.

Jonas argues that investors are largely assigning value to SpaceX’s space and connectivity businesses while giving relatively little credit to its AI operations. In his model, those established businesses account for approximately $123 of the share price, leaving just $17 attributable to AI.

That implies an unusually low valuation for the AI business relative to other infrastructure companies, in Morgan Stanley’s view.

The contrast is becoming increasingly important for investors. SpaceX and Tesla are facing renewed political uncertainty just as expectations for their technological and financial ambitions continue to rise.

For now, the election-driven selloff suggests that political exposure remains a meaningful part of the valuation of Musk’s companies, even as Wall Street’s earnings forecasts for SpaceX move sharply higher.