As the artificial intelligence revolution takes off, the largest big tech stocks have seen their share prices soar, earning themselves the title "The Magnificent Seven."
That is, except for one in this group: Tesla (TSLA -1.11%). As the youngest of these seven stocks, Tesla had been thought of as the next big thing that could one day assume the crown of largest company in the world.
But the past year hasn't turned out that way. In fact, Tesla's fortunes have gone in reverse, with its market value now well out of the top seven companies.
Yet does this year's underperformance mean Tesla should now be excluded from this venerated group?
The case against Tesla's "elite stock" status
The other Magnificent Seven stocks all share certain traits in common. One is obvious: market cap, or total company size. The term was initially used to name the seven largest companies in the world outside of Saudi Aramco.
On this criterion alone, Tesla no longer qualifies. Its 28.6% decline this year and 57.1% plunge from all-time highs has caused it to fall well out of the seven largest stocks this year.
In fact, at a $565 billion market cap, Tesla is now the 13th largest company in the world, or 14th if one considers Saudi Aramco. Larger "non-Magnificent Seven" companies include Berkshire Hathaway, Taiwan Semiconductor Manufacturing, Eli Lilly, Novo Nordisk, Broadcom, and Visa. Each of these companies is now larger than Tesla in terms of market cap.
Elements of what makes a "Magnificent Seven" stock besides size
But there's a reason why these companies are called "magnificent" just beyond their market cap. Among these reasons are deep competitive advantages, along with the ability to scale over much of the globe, leading to high margins and perpetual growth.
For instance, Alphabet (GOOG 9.96%) (GOOGL) has a 90%-plus market share of search, leading that category all over the world outside China, and also owns streaming video leader YouTube and the Android OS, one of only two major mobile operating systems. Meta Platforms (META 0.43%) benefits from the inherent network effects of social media and has scaled globally as the universal social profile site worldwide. Microsoft (MSFT 1.82%) similarly dominates PC operating systems, enterprise software, and business social media via LinkedIn and is part of powerful oligopolies in the growth industries of cloud computing and video games. Amazon (AMZN 3.43%) dominates U.S. and international e-commerce and is a first-mover and leader in global cloud computing. And Apple (AAPL -0.35%) obviously has perhaps the most dominant consumer franchise of all time with the iPhone, which is incredibly valuable real estate upon which to sell more services to its global user base.
These deep competitive advantages, along with massive global scale, generally enable several financial characteristics. This includes the financial wherewithal to invest in new products and services, enabling long-term growth above global GDP, all while achieving high margins and capital returns. While Amazon may be an exception in terms of margins and capital intensity, it's also known that Amazon spends most or all of its underlying profit on new products and services, even inventing new categories on its own, such as cloud computing. Moreover, it has broken out its cloud unit's operating margins, which generally track near 30%, and its growing digital advertising empire is likely to have very high margins as well, if Google's and Meta's margins are any indication.
How does Tesla compare?
The question is, does Tesla fit in with the financial characteristics of these other six companies?
That's not a black or white answer. However, Tesla's financials and competitive advantages don't seem as robust, at least today. For instance, while Tesla bills itself as a disruptive clean energy technology company, it still generated over nearly 94% of its revenue from the sales of its cars and related services.
So, for all intents and purposes, Tesla is a car company at the moment. And the auto industry is generally less attractive than most others, as it's both capital-intensive and cyclical, leading to big swings in results. Moreover, as a mature market, its annualized growth over this decade is only projected to be a little over 4% on a global basis, according to Zion Market Research.
While Tesla seemed like it was on its way to making tech-like margins in the car industry, the recent slowdown in the electric vehicle market has shown Tesla isn't immune from the harsh auto sector cyclicality. Amid a price war and discounts, Tesla's operating margins have declined from 16.8% in 2022 to just 9.2% in 2023. Moreover, operating margins appear to still be trending down at 8.2% in the fourth quarter.
In this downturn, in which EV adoption appears to be slowing due to cost, Tesla has cut prices to be competitive. That should be a reminder that the car industry overall is fairly fragmented and competitive. In the U.S. alone, Tesla only garnered a 4.2% market share in 2023. While that was up from 3.8% in 2022, it took some severe price cuts to grow that unit share and Tesla is still well behind the top five industry leaders, which each have greater than 9.8% share.
So, from both an operating margin perspective, market share, and industry perspective, it doesn't appear that Tesla belongs in the same category as the Magnificent Seven.
Image source: Tesla.
How Tesla could regain its status
That being said, that is not to say Tesla can't regain that status in the future. This will likely depend on how quickly electric vehicles replace traditional internal combustion engine (ICE) vehicles while fending off hybrid and hydrogen fuel cell alternatives to battery EVs.
Despite its low overall market share in the auto space, Tesla did achieve a dominant 55% market share of the electric vehicle market last year in the U.S. So, if Tesla can dominate the EV niche, and if EVs eventually replace ICE vehicles, Tesla should be able to scale up and get its operating margins going back in the right direction. Furthermore, if Tesla's recent price cuts allow it to gain more and more market share in EVs, leading to bankruptcies or consolidation among the competition, then Tesla's lead in EVs will eventually become even more robust.
In addition, other products such as its superchargers could lead to nice recurring revenue growth as more and more electric vehicles charge up over time. And of course, there is the potential for new technology breakthroughs in terms of renewable energy, storage, or autonomous driving.
But investors need to wait and hope for that to happen
However, there aren't really tangible proof points of these positive factors at this point in time. While Tesla's services revenue, including charging revenue, showed growth last year, that growth slowed and was just flat quarter-over-quarter in the fourth quarter. Renewable energy deployment only grew 10% with unclear profitability, making up just 5.7% of Tesla's revenue.
Meanwhile, while it's likely EVs will eventually grow to make up most or even nearly 100% of the auto market, it could be quite a long road to get there – as in decades. Meanwhile, all legacy carmakers are pursuing their own electric vehicle strategy as well. So, it's not clear that Tesla's dominant share of the electric vehicle market will hold. After all, last year, Tesla saw a 10-percentage-point decline in U.S. EV market share, from 65% to 55%, as more and more competitors came out with their own new EV designs.
Potential breakthroughs in AI and autonomous driving and the launch of an autonomous ride-hailing service are probably the things most likely to launch Tesla back into venerated Magnificent Seven status. However, it's impossible to know if Tesla will achieve that ahead of several competitors pursuing the same breakthrough or if the world will be ready for widespread autonomous driving anytime soon.
The verdict
I don't think Tesla currently belongs in the Magnificent Seven at this time, especially as it's the 13th-largest U.S.-listed company. Could I be wrong? Absolutely. But only time and Tesla's execution on next-generation technologies will tell.
