Describing 2023 in the stock market without mentioning the “Magnificent Seven” – the world’s dominant technology companies: Tesla, Nvidia, Apple, Amazon, Meta Platforms, Microsoft, and Alphabet – would be remiss. These stocks have experienced remarkable gains, ranging from 50% to 250%, propelling the broader markets to substantial growth.
The momentum of these stocks is undeniably strong, but discerning investors must differentiate which companies can sustain this upsurge and which might face a setback in the near future.
2023: Hype Over Substance
Investors inherently focus on the future, thereby susceptible to the hype surrounding a company’s potential. Tesla is a case in point. CEO Elon Musk’s outspoken presence on social media has generated tremendous publicity around Tesla’s upcoming ventures, such as the Cybertruck and artificial intelligence advancements.
However, Tesla’s current business heavily relies on the sale of its existing electric vehicles, namely the Models S, 3, X, and Y. To bolster unit sales, Tesla has resorted to aggressive price reductions, directly impacting profit margins. With operating margins decreasing nearly 6 percentage points in under a year, the skepticism is warranted.
While there is a counterargument asserting that Tesla’s aggressive pricing strategy aims to bolster market share and reduce costs through improved factory efficiency, the success of this strategy remains uncertain.
Diminished Expectations
Investors anticipate a pivot where Tesla’s operating margin ceases to decline, translating into an upsurge in its bottom line. Nonetheless, analysts have downscaled their long-term earnings growth expectations for Tesla, dropping from an average of 24% annually to under 17%.
With the stock’s current PEG ratio signaling overvaluation and declining margins coupled with potentially sluggish earnings growth, the exorbitant rise of Tesla’s shares feels akin to defying gravity – a conflict that gravity should eventually win.
The verdict is plain – investors should exercise caution before chasing Tesla stock at these inflated prices. The stock becomes a prime contender for a downturn should the broader market show signs of frailty in 2024.
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