With a decline of more than 50%, this “Magnificent Seven” stock is a screaming buy

By | April 1, 2024

From groundbreaking technological advancements to disruptive business models, each member of the ‘Magnificent Seven’ has carved out a niche for themselves in the global economy. This group of mega-cap companies, consisting of Apple, Amazon, Alphabet, Microsoft, Metaplatforms, NVIDIAAnd Tesla (NASDAQ: TSLA)represents the pinnacle of success, with market dominance, visionary leadership and unparalleled growth prospects.

Amid these prized offerings, however, one stock offers a particularly attractive opportunity for growth investors: Tesla.

Tesla car at super charging station

Image source. Tesla.

Explanation of Tesla’s recent woes

After an explosive start to the 2020s, Tesla shares have been falling since hitting its all-time high of $407 in 2021. And that decline has gotten even worse in 2024, with shares down more than 25% this year alone.

Several factors could explain Tesla’s lack of performance, but one in particular stands out: the weakened outlook for electric vehicle (EV) sales growth in 2024. Although the market is still expected to grow in 2024 , forecasts predict it will grow more slowly. interest than before, as higher interest rates have increased the cost of purchasing a car and deterred many potential buyers.

Moreover, the customer base for electric vehicles is shrinking, at least temporarily. Many consumers who can afford new electric cars and probably consider themselves trendsetters have already purchased one. The remaining customer base is largely made up of those who don’t necessarily care about switching to electric vehicles or who can’t afford one.

To address this, Tesla implemented a series of significant price cuts on its models in 2023. While this helped maintain demand, it negatively impacted profit margins. In 2022, Tesla’s gross profit margin was nearly 30%, an impressive feat in a capital-intensive business that placed the company at the top of the auto industry by that metric. However, since the price cuts, Tesla’s margins have fallen. Today they hover around 17%, which is more in line with the rest of the auto industry.

TSLA Gross Profit Margin Chart (Quarterly).TSLA Gross Profit Margin Chart (Quarterly).

TSLA Gross Profit Margin Chart (Quarterly).

Add a little context

In light of all that, it’s not hard to see why Tesla stock has lost more than half its value. But to see the opportunity that exists today, we have to zoom out a little further and recognize how prolific the Tesla company is, and recognize that these problems are small speed bumps on its growth trajectory.

Even amid these challenges, Tesla continued to prove why it is in a league of its own. In 2023, it again set new records in total production and unit sales. Moreover, even with the price cuts, it set a new record for annual sales of more than $95 billion, a new net income record of $15 billion, and strengthened its cash reserves to a whopping $29 billion.

It is mainly this cash that makes it attractive. The large capital reserves give Tesla the ability to take steps that few other EV manufacturers can afford in the current landscape, such as expanding production capabilities.

The company is in the early stages of building a new factory in Mexico and is in preliminary discussions to build the first factories in India and Thailand. While other manufacturers have been forced to scale back operations due to higher costs and interest rates, Tesla has been moving full steam ahead to expand its customer base and production capacity.

Furthermore, interest rates and weakened sales forecasts may be short-term phenomena that equip Tesla to weather the market turbulence. Should interest rates fall, which is likely to happen this year, Tesla should see demand return.

Go one step further

Strictly from an EV perspective, Tesla’s prospects look quite attractive today. However, its true potential comes into focus when analyzing the other efforts it pursues. Fueled by its large cash reserves, Tesla is actively developing several promising technologies. Humanoid robots, autonomous driving and artificial intelligence are some of the main areas of focus today. This year alone, it will pour more than $1 billion into the research and development budget for its supercomputer.

As Tesla executives described it during the most recent earnings call, the company is currently between two growth cycles. The former catapulted Tesla to the status of the world’s most valuable automaker and made its Model Y the best-selling vehicle in the world. But the coming growth cycle will be driven by the next-gen sub-$25,000 car, robotics, artificial intelligence and much more. Once these technologies are fully developed, Musk predicts Tesla will one day become the most valuable company in the world.

In many ways, investing in Tesla today would be similar to investing in Tesla before 2020. So, as many skeptics and critics fear, it’s worth adding some context, zooming out a bit and seeing where Tesla is going compared to its current position.

While Musk has a reputation for visions of grandeur and setting overly optimistic timelines, it’s hard to ignore his potential to ultimately make this happen. For investors who have some time on their hands and are looking for the stock with the most potential out of the Magnificent Seven, Tesla’s share price decline makes it extremely attractive.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. RJ Fulton has positions in Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

These “Magnificent Seven” Stocks Are Down More Than 50% and Are a Screaming Buy Originally published by The Motley Fool

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