Any observer of the stock market would quickly realize that stocks in the so-called ‘Beautiful seven” have come to dominate portfolio weightings and discussion. The size of these companies, coupled with their focus on technology and innovation, has attracted capital and investor attention.
Historically, these stocks have delivered strong returns for their shareholders, well above those of the broader market. However, investors should not simply assume that this outperformance will continue.
In fact, I predict this Magnificent Seven stock will lose to the S&P500 between now and 2030.
This is a car company
The company I’m talking about that I think will underperform the broader index is none other than Tesla (NASDAQ: TSLA). Over the past five years, the shares are up 1,170% respectively, which is undoubtedly a phenomenal return. But I don’t believe this trend will continue for the rest of this decade.
One reason I think Tesla will underperform is because it is still a car company. In the second quarter, 78% of revenue came from the sale of electric vehicles (EVs). Growth used to be fantastic. Tesla experienced strong demand for its EV range. Even more impressive, profitability improved, a bright spot considering the massive losses that domestic EV rivals continue to post.
However, Tesla’s differentiation is decreasing. It proves that it is so can’t Escape the reality of being a car manufacturer. Higher rates have put pressure on consumer demand because they make buying new cars less affordable, leading to much slower sales gains. And competitive factors have forced the company to lower prices for its vehicles.
As a result, margins have taken a hit. Tesla is negative influenced by macro and industrial forces.
Owning auto stocks has generally not been a lucrative venture, to say the least. Major Detroit automakers, such as Ford Motor Company And GMhave lost to the S&P 500 over the past three, five and ten years.
Focus on the present
Of course, Tesla likes to present itself as more than just a car company. But I view all of the company’s other activities as an addition to the conversation that distracts investors from realizing that this is still an automaker. Sure, there is certainly some value in autonomous driving, artificial intelligence and robotics. But A lot of work needs to be done to monetize this effectively.
The market is still extremely optimistic that Tesla will transform its business model from electric vehicle sales to a dominant mobility platform in the future. In other words, the investment community believes this company will look completely different in five to 10 years. That is almost impossible to predict. Instead, investors should see the company as it currently is.
Even with the shares trading 46% below their November 2021 peak, they are selling for a steep price-to-earnings ratio of 61.9. This praises a lot of optimism about the future. Tesla disappointed investors with its “We, Robot” event last week, based on a stock drop of about 8% between October 10 and October 17.
I think this again points to a long, uncertain road for Tesla to make progress on its autonomous goals, with more questions than answers. Today’s valuation tells me that the market believes that a favorable outcome within a reasonable time frame is a virtual certainty.
Not only do I believe Tesla is still a long way from introducing full self-driving capabilities, if at all, but I think the stock is still overvalued at current levels. This combination is not the right recipe for achieving market-based 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 would easily choose the latter.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Tesla. The Motley Fool recommends General Motors and recommends the following options: In January 2025, $25 would appeal to General Motors. The Motley Fool has a disclosure policy.
Prediction: This ‘Magnificent Seven’ Stock Will Lose to the S&P 500 Between Now and 2030 Originally published by The Motley Fool
