Tesla's stock is underperforming compared to other tech stocks in the market due to concerns about slowing demand for electric vehicles and its lack of association with artificial intelligence. (REUTERS)AI 

Elon Musk Faces Dual Challenges: Declining EV Demand and Uncertain AI Credentials Pose Difficulties

The inclusion of Tesla Inc. in a list of the most significant stocks in the market is being questioned amidst a debate on Wall Street. While the rest of the market is experiencing a rally, shares of Elon Musk’s electric-vehicle company are plummeting, and the company itself is cautioning that the situation may not improve in the near future. Previously considered a key player among the influential tech stocks known as the Magnificent Seven, which have propelled the S&P 500 Index to record levels, traders are now uncertain if Tesla deserves to be grouped with these other dominant companies.

After doubling last year, Tesla’s stock price is down 22% from 2024. Compare that to Nvidia Corp.’s 46% gain or Meta Platforms Inc.’s 32% year-to-date gain, and it’s easy to see where the questions are coming from. Indeed, it is by far the worst performance in the Magnificent Seven index this year.

The problem for the electric vehicle maker is that six of those seven companies are benefiting from the excitement surrounding growing AI technology. The group gained a record 29.5% weight in the S&P 500 last week, even as Tesla fell, according to data compiled by Bloomberg. But despite Musk’s efforts to invest his company in AI, the reality is that Tesla faces unique challenges.

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“Although Elon Musk would probably disagree, investors don’t see Tesla as an AI like most other Magnificent Seven stocks,” said Matthew Maley, chief market strategist at Miller Tabak Co. “We have a different background for Tesla and Tesla. other Mag Seven – the demand trend for Tesla products is fading, while it is exploding for those companies that are more related to artificial intelligence.”

Outlook dimming

At the heart of this gap is the dimming of 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 used to seeing.

About a third of analysts covering Tesla recommend buying the stock, compared to an average of 85% for the rest of the Magnificent Seven. In addition, analysts have cut their average 2024 earnings estimate for Tesla by nearly half over the past 12 months, while others’ earnings expectations have risen or stayed the same.

“The challenge is that Tesla has become a one-product company — the Model Y, where all other initiatives are either not relevant as a driver of revenue and earnings, or are still a bit of a science project,” said Jeffrey Osborne of Cowen. “Being a single-product company and not managing the timing of product cycles poorly can cause periods of pain that we’re in now until the next-generation vehicle hits the market next year or in 2026.”

The twin problems of slowing electric car demand and waning AI powers are making it hard for investors to swallow Tesla’s sky-high valuation. Even after this year’s sale, the stock trades at more than 60 times forward earnings. The second most expensive Magnificent Seven stock is Nvidia Corp. at about 36 times forward earnings, while the rest trade in the 20s and 30s.

“Over the course of the year, the rest of the Mag Seven were able to demonstrate how AI was driving real, profitable business growth,” Brian Johnson, a former Barclays auto analyst and founder of Metonic Advisors, said in an interview. “Tesla investors just got random Optimus videos, Musk’s confession Dojo was a moonshot, and yet another fully self-driving release that may be an improvement, but still far from robotaxi capabilities.”

In contrast, other mega-cap tech companies boast diversified and stable revenue streams, which in most cases means slightly slower growth, but also less volatile stocks.

The bet of the future

Tesla believers say the company’s unique position as the only profitable, large-scale pure electric car maker earns it a place in an elite club. Although demand is expected to decline in the near future, experts widely expect electric cars to eventually dominate the automotive industry. For anyone looking to bet on the future, Tesla remains the only real game in town, which also explains its high market cap and the all-or-nothing nature of the company’s stock price — up 50% in 2021 and down 65%. 2022 and then 102% in 2023.

“I understand that traders are short-term negative on stocks,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. “But long-term investors are likely to be more positive because no other electric vehicle manufacturer can profitably produce Tesla’s volume in the pure EV space.”

Bullish Tesla investors also point out that the company’s revenue growth after 2024 is expected to exceed all of the Magnificent Seven numbers except Nvidia Corp. Its earnings are also forecast to bounce back in 2025 after a dip this year and rise faster. like most other mega cards.

Still, Tesla’s heavy exposure to the cyclical auto industry makes it stand out among the Magnificent Seven, especially given the uncertainty surrounding self-driving car technology. While Musk has often argued that a future where so-called robotics are commonplace is not far off, most industry experts believe it is still years, if not decades, away.

“Tesla is one of the riskiest companies we cover because the underlying business is cyclical and autonomy is binary,” said Ivana Delevska, chief investment officer at Spear Invest. “They will either crack the code of autonomy or this will take several years before anyone gets a solution.”

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