Home Market News Revisiting Tesla’s Inclusion in the Elite “Magnificent Seven” Tech Stocks

Revisiting Tesla’s Inclusion in the Elite “Magnificent Seven” Tech Stocks

Revisiting Tesla’s Inclusion in the Elite “Magnificent Seven” Tech Stocks

As the artificial intelligence revolution gains momentum, the stock market giants have thrived, earning the illustrious title “The Magnificent Seven.” However, one notable member, Tesla (NASDAQ: TSLA), finds itself lagging behind its peers in this elite group.

Once hailed as the rising star poised to claim the top spot globally, Tesla’s trajectory took an unexpected turn over the past year. The company’s market value has taken a nosedive, causing it to lose its position among the seven largest companies in the market.

Despite this stark reversal in fortune, the question remains: Should Tesla now be excluded from this revered cohort?

Rethinking Tesla’s Status as an “Elite Stock”

The hallmark of the other Magnificent Seven stocks is their considerable market capitalization. Tesla’s recent 28.6% decline and a sharp 57.1% drop from its peak have effectively ousted it from this prestigious group of companies.

With a market cap of $565 billion, Tesla currently ranks as the 13th largest company globally, or 14th if Saudi Aramco is considered. Companies surpassing Tesla in market cap include Berkshire Hathaway, Taiwan Semiconductor Manufacturing, Eli Lilly, Novo Nordisk, Broadcom, and Visa.

Characteristics of a “Magnificent Seven” Stock Beyond Size

The title “magnificent” embodies more than just market cap—it encompasses deep competitive advantages and global scalability, leading to high margins and sustained growth.

For instance, Alphabet (NASDAQ: GOOG) (GOOGL) dominates the search market with over 90% market share globally, operates YouTube and Android OS, and constitutes one of the two major mobile operating systems. Similarly, Meta Platforms (NASDAQ: META) leverages network effects in social media, while Microsoft (NASDAQ: MSFT) asserts influence across PC operating systems, enterprise software, and cloud computing. Amazon (NASDAQ: AMZN) leads e-commerce and cloud services, and Apple (NASDAQ: AAPL) boasts the iconic iPhone franchise.

These firms’ robust competitive advantages and global presence facilitate high margins, capital returns, and ongoing innovation. Although Amazon’s margins differ, its focus on new services and categories sustains growth.

Evaluating Tesla’s Position

Does Tesla align with the financial characteristics of its elite peers?

Presently, Tesla, primarily a car manufacturer, derives nearly 94% of its revenue from vehicle sales. The auto industry’s capital intensity and cyclicality render it less enticing compared to other sectors, projecting modest annual growth over the next decade.

Despite initial optimism for tech-like margins in the auto sector, Tesla’s operating margins have dwindled amid industry slowdowns and price wars. Its recent tactical price reductions aim to bolster market share, indicating the cutthroat nature of the auto market. Tesla’s U.S. market share of 4.2% pales in comparison to leading industry players with more than 9.8% market share.

Considering operating margins, market share, and industry dynamics, Tesla’s suitability for the Magnificent Seven appears tenuous.

Tesla cybertruck.

Image source: Tesla.

Potential for Tesla’s Restoration

Although Tesla currently falls short of its elite status, the future holds promise for its reinstatement. Success hinges on the pace of electric vehicle adoption versus traditional models, alongside the fend-off against hybrid and hydrogen alternatives.

While Tesla’s overall auto market share remains modest, its dominance in the electric vehicle sector—capturing 55% of the U.S. market last year—furnishes hope for a resurgence. As electric vehicles gain ground, Tesla could reclaim its foothold with improved operations and expanded market share.

Furthermore, ancillary products like superchargers offer avenues for recurring revenue growth. Breakthroughs in renewable energy, storage, or autonomous driving could further bolster Tesla’s trajectory.

Patient Optimism for Tesla’s Revival

While the road to redemption for Tesla is paved with uncertainties, the company’s strategic maneuvers and potential for innovation could mark a turnaround in its fortunes over time.

Tesla’s Road to the Future: A Bump in the Electric Highway?

Tesla’s Road to the Future: A Bumpy Ride in the Electric Highway?

Revenue Growth and Renewable Energy Deployment

Tesla’s services revenue, which includes charging revenue, experienced growth last year. However, this growth plateaued, showing flat quarter-over-quarter performance in the fourth quarter. The deployment of renewable energy only managed a 10% increase, with murky profitability, accounting for a mere 5.7% of Tesla’s revenue.

Competition and Market Dynamics

Despite the likelihood that electric vehicles (EVs) will dominate the auto market in the future, reaching almost 100%, the journey ahead seems long, possibly spanning decades. Legacy automakers are aggressively pursuing their electric vehicle strategies, challenging Tesla’s stronghold on the EV market. Notably, Tesla experienced a significant 10-percentage-point drop in U.S. EV market share, from 65% to 55%, as more competitors introduced their own EV models.

Challenges and Potential Breakthroughs

Potential breakthroughs in artificial intelligence (AI) and autonomous driving, along with the impending launch of an autonomous ride-hailing service, could propel Tesla back into its once-mighty position. Whether Tesla can achieve this feat amidst fierce competition from rivals vying for similar advancements and uncertainty regarding the widespread adoption of autonomous driving remains ambiguous.

The Verdict on Tesla

Currently, Tesla’s position in the esteemed “Magnificent Seven” seems doubtful, especially considering its rank as the 13th-largest U.S.-listed company. While there is a possibility of being mistaken, only time and Tesla’s execution of next-generation technologies will provide a definitive answer.

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Suzanne Frey, an executive at Alphabet, John Mackey, former CEO of Whole Foods Market, and Randi Zuckerberg, former director at Facebook, all members of the Motley Fool’s board, provide diverse perspectives. Contributor Billy Duberstein holds various positions in tech and consumer companies while his clients may own shares in these firms. The Motley Fool has investment positions in major companies including Tesla, Microsoft, and Amazon, disclosing a wide range of interests and affiliations.

The views and opinions expressed herein belong solely to the author and may not align with those of Nasdaq, Inc.