If you're making a list of the most important stocks in the market, Tesla should be on that list as well. Or is it?
It's part of a growing debate on Wall Street, with shares in Elon Musk's electric car maker falling as the rest of the market rebounds. And the company has warned that the situation may not improve for some time. Traders are now wondering whether Tesla's name, an original member of the so-called “Magnificent Seven” tech stocks that has propelled the S&P 500 index to new heights, is next to other heavyweights. ing.
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Tesla stock is down 22% heading into early 2024 after doubling last year. Compare that to Nvidia Inc.'s 46% gain and Metaplatforms' 32% gain since the beginning of the year, and it's easy to see where the doubts are coming from. . In fact, it is by far the worst performer on the Magnificent Seven Index this year.
The problem for EV makers is that six of these seven companies are benefiting from the excitement around burgeoning artificial intelligence technology. Despite Tesla's decline, the group's weight in the S&P 500 reached a record 29.5% last week, according to data compiled by Bloomberg. But despite Musk's efforts to position his company as his AI investment, the reality is that Tesla faces a unique set of challenges.
“Elon Musk probably wouldn't agree, but investors are seeing Tesla as an AI powerhouse unlike most of the other Magnificent Seven stocks,” said Matthew Maley, chief market strategist at Miller Tabak. I haven't seen it,” he said. While the demand trend for Tesla products is fading for other companies in Mag7, demand is exploding for companies with strong connections to AI. ”
the outlook becomes bleak
At the heart of this disagreement is the bleak outlook for electric vehicles. Demand is expected to slow in 2024 and possibly beyond, raising questions about Tesla's ability to grow at the rapid pace investors are used to seeing.
About a third of analysts covering Tesla recommend the stock as a buy, compared to an average of 85% among the remaining analysts on the Magnificent Seven. What's more, analysts have cut Tesla's 2024 profit forecasts by almost half on average over the past 12 months, while earnings estimates for other companies have either risen or remained flat.
“The challenge is that Tesla has become a single-product company, the Model Y, and its other efforts either don't contribute much to revenue or profits or are still little science projects,” said Jeffrey Osborn of Cowen. he said. “If you're a single-product company and you mismanage the timing of your product cycle, you can have a period of distress. We're in this situation right now until the next generation of cars comes out next year or 2026. It is located in.”
The dual problems of slowing EV demand and unstable AI are making it difficult for investors to swallow Tesla's sky-high valuation. Despite this year's steep decline, the stock still trades at more than 60 times forward earnings. The second most expensive stock in the Magnificent Seven is Nvidia, with a forward P/E ratio of about 36 times, while the rest of the stocks hover between the low 20s and low 30s.
Brian Johnson, a former Barclays auto analyst and founder of Metonic Advisors, said in an interview that, “This year, other members of MagSeven have focused on how AI can actually drive profitable business growth. I was able to show what I was doing.” “Tesla investors just got a random Optimus video. Mr. Musk's entrance dojo is a moon shot, and while it may get better, it's still a long way from robotaxi capabilities.”
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In contrast, the remaining large-cap technology companies boast diversified and stable revenue streams, and most have slightly slower growth but less volatile stock prices.
bet on the future
Tesla believers argue that the company's unique status as the only profitable large-scale pure-play EV manufacturer earns it a seat in an elite club. Although demand is expected to decline in the short term, experts widely predict that electric vehicles will eventually dominate the auto industry. For those looking to bet on its future, Tesla remains the only real game in town, which also explains its high market valuation and the all-or-nothing nature of the company's stock price – 2021 It soared 50% in 2021, plummeted 65% in 2021, rose 102% in 2022, and grew rapidly by 102% in 2023.
“It's understandable that traders would be negative on stocks in the short term,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. “However, in the pure EV space, long-term investors are likely to take a more positive view given that other EV manufacturers cannot profitably produce as many cars as Tesla.”
Bullish Tesla investors also point out that Tesla's revenue growth after 2024 is expected to outpace all of the Magnificent Seven, except Nvidia. The company's revenue is also expected to recover in 2025, after falling this year, and will rise at a faster pace. than most other megacaps.
Still, Tesla's heavy involvement in the cyclical auto industry makes it stand out among the Magnificent Seven, especially given the uncertainty surrounding self-driving car technology. Although Musk has frequently claimed that a future where so-called robotaxis become commonplace is not far off, most industry experts believe that is still years, if not decades away. I think so.
“Tesla is one of the riskier companies we cover because the underlying business is cyclical and the autonomy part is Because it's a duality.” “It will take years for them to crack the code on autonomy or find a solution.”
© 2024 Bloomberg
