When it comes to 2023 in the stock market, there’s no overlooking the unstoppable rise of the elite “Magnificent Seven” tech companies: Tesla (NASDAQ: TSLA), Nvidia, Apple, Amazon, Meta Platforms, Microsoft, and Alphabet, propelling the broader markets to extraordinary gains ranging between 50% and 250%.
It’s hard to root against such robust momentum, but it’s crucial for investors to discern which companies can sustain the rally and which are teetering on the edge of a downturn.
Flimsy Foundations: 2023 Hype vs. Reality
In the case of electric vehicle titan, Tesla, there’s a worrying prospect for a significant retreat in 2024. Despite the solid long-term potential, the unmerited surge of the stock this year raises skepticism about its current standing.
Here’s the glaring issue at hand.
Hype Over Substance: 2023 Performance
Investors often fix their gaze on the future, leading to exaggerated market reactions to a company’s potential. This rhetoric seems to have influenced Tesla’s trajectory. For instance, CEO Elon Musk’s public persona, coupled with the buzz surrounding Tesla’s forthcoming products and advancements in artificial intelligence, have undeniably played a part in its ascent.
Yet, Tesla’s current revenue stream heavily relies on selling its existing electric vehicles. The aggressive price cuts to bolster unit sales have directly impacted profit margins, causing a steep decline from 17% to just over 11% in under a year.
While there’s an argument advocating Tesla’s strategic use of price reductions to expand market share and enhance efficiency, the effectiveness of this approach remains uncertain.
Deflated Prospects: Dwindling Expectations
Investors are now hoping for a turnaround where the plummeting profit margins stabilize and bring about an upswing in Tesla’s bottom line. However, analysts have tempered their outlook for Tesla, downgrading the expected long-term annual earnings growth from 24% to under 17%.
This climate of uncertainty has pushed the stock’s PEG ratio to over four, signaling an excessive valuation relative to the anticipated earnings growth. With diminishing margins and a potential deceleration in earnings growth, the soaring stock now flirts with the forces of gravity, which it might eventually succumb to.
Unsettling Ascent: Skyrocketing Stock
Conventionally, impending risks trigger a stock’s downward spiral. Nevertheless, Tesla defies this logic, having ascended by a staggering 120% in 2023. However, this soaring trajectory hasn’t been shadowed by a corresponding earnings growth, resulting in a substantial inflation of the stock’s valuation. With the operating margins continuing their descent, the stock’s current forward P/E of 78 seems exorbitant.
The overall scenario paints a cautionary tale, warning investors against heedlessly pursuing Tesla stock at these elevated prices. If the broader market wobbles in 2024, Tesla stands as a prime candidate for a downward plunge. While Tesla could still flip the script by demonstrating the efficacy of its strategy, the current valuation affords little room for such leaps of faith.