It’s easy to get caught up in the hype, but investors must temper expectations.
Any observer of the stock market would quickly realize that stocks in the so-called “Magnificent Seven” have come to dominate portfolio weightings and the conversation. The size of these businesses, coupled with their focus on technology and innovation, has drawn the capital and attention of investors.
Historically, these stocks have produced strong returns for their shareholders, well in excess of the broader market. However, investors shouldn’t just assume that this outperformance will continue.
In fact, I predict that this Magnificent Seven stock will lose to the S&P 500 between now and 2030.
This is a car company
The business I’m referring to that I believe will lag the broader index is none other than Tesla (TSLA -0.09%). In the past five years, shares have soared 1,170% respectively, which is undoubtedly a phenomenal return. But I don’t believe this trend will continue throughout the rest of this decade.
One reason why I think Tesla will underperform is because it’s still a car company. In Q2, 78% of its revenue came from selling electric vehicles (EVs). In the past, growth was fantastic. Tesla was experiencing strong demand for its EV lineup. Even more impressive, profitability was improving, a bright spot when you consider the massive losses domestic EV rivals continue to post.
However, Tesla’s differentiation is diminishing. It is proving that it can’t escape the realities of being an auto manufacturer. Higher rates have pressured demand from consumers because they make buying new cars less affordable, which has led to much slower sales gains. And competitive factors have forced the business to cut prices on its vehicles.
Consequently, margins have taken a hit. Tesla is being negatively impacted by macro and industry forces.
Owning auto stocks generally hasn’t been a lucrative endeavor, to say the least. Big Detroit automakers, like Ford Motor Company and GM, have lost to the S&P 500 in the last three-, five-, and 10-year periods.
Focus on the present
Of course, Tesla likes to present itself as more than just a car company. But I view all the company’s other activities as adding a lot of noise to the conversation that distracts investors from realizing that this is still an auto manufacturer. Sure, there is certainly some value in autonomous driving, artificial intelligence, and robotics endeavors. But a lot of work needs to be done to effectively monetize this.
The market is still extremely bullish on Tesla transforming its business model in the future away from the sale of EVs to a dominant mobility platform. In other words, the investment community believes this business will look totally different five or 10 years from now. That’s almost impossible to predict. Instead, investors should view the company as it currently is.
Even with shares trading 46% below their November 2021 peak, they sell for a steep price-to-earnings ratio of 61.9. This prices in a lot of optimism about the future. Tesla disappointed investors with its “We, Robot” event last week, based on the stock being down about 8% between Oct. 10 and Oct. 17.
I think this again points to a long, uncertain road ahead for Tesla to make progress on its autonomous goals, with there being more questions than answers. Today’s valuation tells me that the market thinks a favorable outcome in a reasonable time frame is a virtual certainty.
Not only do I believe that Tesla is still a long way from introducing full self-driving capabilities, if at all, but I think the stock remains overvalued at current levels. This combination is not the proper recipe for achieving market-beating returns. If I had to choose between owning Tesla or an S&P 500 exchange-traded fund between now and the rest of the decade, I’d easily pick the latter.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
