Double Whammy for Elon Musk: Slowing EV demand and shaky AI credentials make it hard
If you’re building a list of the most important stocks in the market, Tesla Inc. has to be on it. Or does it? That’s part of a growing debate on Wall Street, where shares of Elon Musk’s electric-vehicle maker are tanking as the rest of the market rallies — and the company is warning that things may not get better for a while. An original member of the so-called Magnificent Seven tech stocks that have been driving the S&P 500 Index to new heights, traders are now wondering if Tesla’s name belongs next to those other powerhouses. After doubling last year, Tesla’s stock price is down 22% to start 2024. Compare that to Nvidia Corp.’s 46% surge or Meta Platforms Inc.’s 32% gain since the beginning of the year and it’s easy to see where the questions are coming from. Indeed, it’s by far the worst performer in the Magnificent Seven Index this year. The problem for the EV-maker is six of those seven companies are benefiting from the enthusiasm surrounding burgeoning artificial intelligence technology. The group hit a record 29.5% weighting in the S&P 500 last week even with Tesla’s decline, according to data compiled by Bloomberg. But despite Musk’s efforts to position his company as an AI investment, the reality is Tesla faces a unique set of challenges. Also read: Looking for a smartphone? To check mobile finder We are on WhatsApp Channels. Click to join.
At the heart of this divide is the dimming outlook for electric vehicles. Demand is expected to slow in 2024, and perhaps beyond, raising doubts about Tesla’s ability to grow at the rapid pace investors are accustomed to seeing. Roughly a third of the analysts covering Tesla recommend buying the stock, compared to an average of 85% for the rest of the Magnificent Seven. Moreover, analysts have cut their average 2024 profit estimate for Tesla nearly in half over the past 12 months, while earnings expectations for the others have risen or stayed flat. “The challenge is that Tesla has become a one-product company — the Model Y, with every other initiative either not a meaningful contributor to revenue and earnings or still a bit of a science project,” said Jeffrey Osborne of Cowen. “Being a one-product company and mismanaging the timing of product cycles can create periods of pain, which is what we are in now until the next generation vehicle comes out next year or in 2026.”
The double trouble of slowing EV demand and shaky AI credentials make it hard for investors to swallow Tesla’s sky high valuation. Even with this year’s selloff, the stock trades at over 60 times forward earnings. The second-most expensive Magnificent Seven stock is Nvidia Corp. at around 36 times forward earnings, while the rest trade between the low twenties and low thirties. “During the year, others in the Mag Seven were able to show how AI was driving real, profitable business growth,” Brian Johnson, former auto analyst with Barclays and founder of Metonic Advisors, said in an interview. “Tesla investors just got some random Optimus videos, Musk’s admission Dojo was a moon shot and yet another full-self-driving release that may be an improvement but still a long ways from robotaxi capability.” In contrast, the rest of the mega-cap technology companies boast of diverse and stable revenue streams, which in most cases translate into slightly…