Tesla’s Stock Plunge: A Golden Opportunity Amidst the Magnificent Seven
Explaining Tesla’s Recent Woes
After an explosive start to the 2020s, Tesla’s stock has experienced a significant downturn, particularly after reaching its all-time high of $407 in 2021. The decline has intensified in 2024, with the stock down more than 25% this year alone. This downward trend can be attributed to several factors, with a weakened outlook for electric vehicle (EV) sales growth in 2024 standing out. Despite the market’s expected growth, the rate has slowed down due to higher interest rates, which have increased the cost of purchasing cars and dissuaded potential buyers. Additionally, the customer base for electric vehicles is shrinking, as those who can afford and are inclined towards EVs have likely already made their purchase, leaving behind a market segment that is either indifferent or financially constrained.
To combat these challenges, Tesla initiated substantial price cuts across its models in 2023. While this strategy helped sustain demand, it adversely affected the company’s profit margins. In 2022, Tesla boasted a nearly 30% gross profit margin, positioning it at the pinnacle of the automotive industry. However, the recent price adjustments have brought its margins down to around 17%, aligning more closely with industry averages.
Adding a Little Context
Despite these setbacks, Tesla’s potential remains undiminished. The company continued to set new records in total production and sales in 2023, alongside achieving a record annual revenue of more than $95 billion, a new net income high of $15 billion, and bolstering its cash reserves to $29 billion. This financial fortitude enables Tesla to undertake initiatives that are beyond the reach of other EV makers, such as expanding manufacturing capabilities with new factories in Mexico, India, and Thailand. Moreover, the current challenges, such as interest rates and weakened sales forecasts, are likely temporary, positioning Tesla to rebound as conditions improve.
Taking It a Step Further
Beyond its core EV business, Tesla is investing heavily in developing technologies like humanoid robots, autonomous driving, and artificial intelligence, with more than $1 billion allocated to its supercomputer research and development this year. These initiatives represent the next growth cycle for Tesla, which could redefine its market value and solidify its position as a leading innovator. Tesla’s ambition to become the most valuable company globally hinges on the successful development and integration of these technologies into its business model.
The current dip in Tesla’s stock presents an attractive entry point for investors, reminiscent of the pre-2020 era. Despite skepticism and criticism, Tesla’s visionary leadership and strategic investments suggest a bright future, making it a compelling option for growth investors among the Magnificent Seven.