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Tesla Struggles This Year, But What’s Next?

Tesla has seen a lull in demand this year, failing to capitalize on the hype around artificial intelligence (AI), leading to a dismal performance of its stock price thus far.
Despite this short-term setback, Tesla shares still maintain a strong following for the long term.

Following a doubling in value last year, Tesla’s stock price has declined by 22 percent so far this year. This is a stark contrast when compared with Nvidia’s 46 percent rise or Meta Platforms’ 32 percent gain, sparking concern among investors. Tesla has been the worst performer in the group of elite companies known in Wall Street jargon as the "Magnificent Seven" Apple, Alphabet, Microsoft, Amazon, Meta Platforms, Tesla, and Nvidia.

Tesla Begins to Lag Behind the Elite Club

The remaining six companies in the elite club have greatly benefited from the market enthusiasm surrounding AI.

Despite Tesla's recent decline, the Magnificent Seven reached a record-weight of 29.5 percent in the S&P 500 last week, according to Bloomberg.

"Investors probably wouldn’t agree with him, but they don’t view Tesla as an AI company," stated Matthew Maley, chief market strategist at Miller Tabak + Co.

While demand for Tesla wanes, interest in products from companies more closely associated with AI surges.

However, the market’s indifference isn’t only affecting Elon Musk’s company; the demand for electric vehicles is expected to slow throughout the year and possibly beyond, casting doubt on whether Tesla can maintain the rapid growth investors are accustomed to.

Only one-third of analysts following Tesla recommend buying its stocks, whereas for the Magnificent Seven an average of 85 percent of analysts give a buy rating. Furthermore, over the past 12 months, the consensus among analysts has nearly halved Tesla's estimated earnings for 2024, while in contrast, expectations for other companies have risen or remained stable.

Tesla Becomes a Single-Product Company

"Tesla has become a single-product company, reliant on the Model Y, and companies with only one product are inherently vulnerable. Tesla's stock is likely to struggle until its next-generation car is launched, either next year or in 2026," stated Jeffrey Osborne from Cowen.

With this in mind, investors find it tough to justify Tesla's soaring valuation, with the stock trading at more than sixty times its expected earnings per share, even after this year’s selloff. The second most expensive is Nvidia at thirty-six times, while others trade at twenty to thirty times.

Tesla advocates argue that the company holds a unique place as the only profitable and significant electric-only car manufacturer, securing its position in the elite club. Despite an expected decrease in demand in the near term, experts widely believe electric vehicles will eventually dominate the auto industry.

The Tide Could Turn Next Year

For those willing to bet on the future, Tesla remains the only real investment, explaining the high market valuation and why the company’s stock price fluctuates so intensely: rising by 50 percent in 2021, dropping by 65 percent in 2022, and then soaring by 102 percent in 2023.

Tesla investors also point out that, excluding Nvidia, the company is expected to outpace all other Magnificent Seven firms in revenue growth from 2025 and experience a surge in profits after this year's decline.

"Tesla is one of the riskiest companies we follow because its core business is cyclical, and the success of its next potential big hit, self-driving cars, is a gamble," said Ivana Delevska, Chief Investment Officer at Spear Invest.
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