The Magnificent Seven: Tesla's Black Sheep or Growth Potential Analysis

From groundbreaking technological advancements to disruptive business models, each member of the "Magnificent Seven" has carved a niche for itself in the global economy. This group of megacap companies, consisting of Apple, Amazon, Alphabet, Microsoft, Meta Platforms, NVIDIA, and Tesla (NASDAQ: TSLA), represents the epitome of success, boasting market dominance, visionary leadership, and unparalleled growth prospects.

Explaining Tesla's Recent Woes

Tesla's stock has been on a slide since it hit its all-time high of $407 in 2021. And that slide has worsened in 2024, with shares down more than 25% this year alone.

Several factors could explain Tesla's lack of performance, but one stands out in particular -- the weakened outlook for electric vehicle (EV) sales growth in 2024. While the market is still expected to grow in 2024, forecasts project it will grow at a slower rate than previously as higher interest rates have raised the cost of purchasing a car and deterred many would-be buyers.

In addition, the customer base for electric vehicles is shrinking, at least temporarily. Many consumers who can afford new EVs and likely consider themselves trendsetters have already purchased one. The remaining customer base consists largely of those who don't necessarily care about switching to EVs or who can't afford one.

Addressing Challenges

To address this, Tesla implemented a series of significant price cuts across its models in 2023. While this helped to keep demand afloat, it negatively impacted its profit margins. In 2022, Tesla's gross profit margin reached nearly 30%, an impressive accomplishment in a capital-intensive business that put it at the top of the automotive industry by that metric. However, since the implementation of price cuts, Tesla's margins have slipped. Today, they hover around 17%, which is more in line with the rest of the auto industry.

TSLA Gross Profit Margin (Quarterly) Chart

Adding Context to Tesla's Position

In light of all that, it isn't hard to see why Tesla's stock has shed more than half its value. However, to see the opportunity presenting itself today, one must zoom out a little further and recognize just how prolific a company Tesla is, and recognize that these struggles are minor speed bumps in its growth journey.

Even amid these challenges, Tesla continued to prove why it belongs in a class of its own. In 2023, it once again set new records in total production and sales on a per-unit basis. On top of that, even with the price cuts, it set a new record on annual revenue at more than $95 billion, a new net income record of $15 billion, and bolstered its cash reserves to a whopping $29 billion.

It is this cash, in particular, that makes it attractive. Its large capital reserves give Tesla the ability to make moves that few other EV makers can afford as well in the current landscape, such as expanding its manufacturing capabilities.

Future Prospects and Investments

Tesla is actively developing several promising technologies. Humanoid robots, autonomous driving, and artificial intelligence are some of its primary areas of focus today. It will pour more than $1 billion into the research and development budget for its supercomputer this year alone.

As Tesla executives described it, the company currently finds itself between two growth cycles. The coming growth cycle will be fueled by its sub-$25,000 next-gen vehicle, robotics, artificial intelligence, and much more. Once these technologies are fully developed, Tesla envisions becoming the most valuable company in the world.

In many ways, investing in Tesla today would be similar to investing in it pre-2020. For investors looking for the stock with the most potential out of the Magnificent Seven, the tumble in Tesla's share price makes it extremely alluring.

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