Tesla vehicles are displayed in a Manhattan showroom on Jan. 24.Spencer Platt/Getty Images
We’re down to the Magnificent Six. After Tesla Inc. (TSLA-Q) released disappointing quarterly financial results this week, the sinking stock diverged further from the pack of big tech companies that dominated the stock market last year.
Does Tesla offer a warning sign of what’s at stake for this narrow group of outperformers?
To be sure, the Magnificent Seven – Nvidia Corp. (NVDA-Q), Meta Platforms Inc. (META-Q), Microsoft Corp. (MSFT-Q), Amazon.com Inc. (AMZN-Q), Alphabet Inc. (GOOGL-Q), Apple Inc. (AAPL-Q) and Tesla – remain a powerful force within the U.S. stock market. The group is up 94 per cent over the past 12 months.
The collective rally easily surpassed the Standard & Poor’s 500 Index by about 73 percentage points over the same period. The gains are even more impressive compared with the equal-weighted version of the benchmark, which dampens the impact of huge companies: This index has risen less than 5 per cent over the past year.
The gains by the Magnificent Seven suggest that the bet on artificial intelligence as a transformative technology – which is a common thread that runs through all members of the group – is flourishing.
But signs of fatigue are emerging.
Fund managers believe that interest in the Magnificent Seven has grown far too much among investors, according to a January manager survey analyzed by Savita Subramanian, an equity and quant strategist at Bank of America.
This “crowded trade” easily eclipses other popular takes, according to the survey, such as wagers against Chinese stocks or bets in favour of Japanese stocks and long-dated U.S. Treasury bonds. Within large-cap equity funds, Microsoft, Alphabet, Meta, Amazon and Nvidia have overweight positions relative to their weights within the S&P 500, further demonstrating the companies’ widespread appeal.
The danger here is that crowded trades can lead to dangerously high valuations and lofty expectations among investors. If disappointment emerges, the shift to unpopular from popular can be swift – with a severe impact on share prices.
Tesla may be caught in this shift right now.
The company has long been championed by investors who believe it can become far more than an electric-vehicle manufacturer, given its leadership in energy storage and – perhaps most importantly – the AI that is integral to the promise of autonomous driving.
The stock surged nearly 170 per cent in the first half of 2023, as interest in AI flourished. Since then, it has been a bumpy ride back down. The stock closed on Thursday at US$182.63 on the Nasdaq exchange, down 12.1 per cent for the day.
Tesla now stands out from its Magnificent peers, and not in a good way. The other six stocks in this group are up by an average of more than 9 per cent this year, but Tesla is down 27 per cent. And while the share prices of the other six companies are near record highs, Tesla’s share price is 38 per cent below its recent high point in 2023 (the stock’s record high was in 2021).
AI enthusiasm goes only so far when the company’s operations are strained by more immediate concerns. Recent price cuts to some Tesla models amid rising competition and weaker demand for EVs are having an impact.
Tesla reported in its fourth-quarter results that income from operations – which doesn’t include a tax benefit – fell 47 per cent from the same period last year. Profit margins narrowed to 8.2 per cent in the quarter, down from 16 per cent last year.
Rather than address the challenges, Elon Musk, Tesla’s chief executive officer, was short on specific targets during a call with analysts.
“We were dead wrong expecting Musk and team to step up like adults in the room on the call and give a strategic and financial overview of the ongoing price cuts, margin structure and fluctuating demand,” Daniel Ives, an analyst at Wedbush Securities, said in a note.
Staunch Tesla investors can point out that the stock has always been volatile. It endured a 50-per-cent decline in 2020, a 30-per-cent dip in 2021 and a 60-per-cent slide in 2022 – but the stock rewarded investors who held on for rebounds.
Now, a broader concern may be emerging. Tesla has exposed a couple of weak spots within the Magnificent Seven: AI doesn’t grant immunity from disappointment and the group of stocks isn’t the cohesive unit it was last year.
The S&P 500 has been hitting record highs over the past week, but it’s clearly going to take more than seven – or rather six – stocks to keep the bull market going.