Here's why Tesla is the only stock in the Magnificent 7 to fall this year

After a year in which Big Tech stocks experienced surging growth fueled by investor excitement over artificial intelligence, the rally seems set to continue for most, though not all, members of the so-called Magnificent 7.

Meta  (META) – Get Free Report, which Thursday announced a more concerted effort to build artificial general intelligence, is up 7% for the year; Microsoft  (MSFT) – Get Free Report, which Friday hit a new 52-week high of $395.85, is up around 5% for the year; Google-parent Alphabet  (GOOGL) – Get Free Report is up around 4% for the year; Amazon  (AMZN) – Get Free Report is up around 1% and Apple  (AAPL) – Get Free Report is down around 1% for the year, though shares spiked this week.

Wall Street’s favorite AI player Nvidia  (NVDA) – Get Free Report, which Friday notched a new 52-week high of $580 per share, is up around 17% for the year.

Alone amongst its high-performing, mega-cap tech giant peers, Tesla  (TSLA) – Get Free Report is neither up nor flat in the weeks since 2024 began. Shares of the electric vehicle giant have fallen some 15% to $209 for the year so far, well off the stock’s July 52-week high of $300.

The reason for this disparity, according to Gary Black, managing partner of the Future Fund, is simple: Tesla keeps cutting EV prices.

Wall Street, he said, “doesn’t buy the argument that cutting prices causes volumes to increase,” and has cut earnings estimates in tandem with Tesla’s relentless price cuts.

Since the year began, Black has cut his 2024 Tesla earnings estimates by 11%, from $4.20 to $3.75.

Stock prices are driven by earnings estimates, Black said. And price cuts cause analysts to cut those estimates.

Wall Street, Black said, also “doesn’t buy the argument that Tesla can cut prices on EVs to zero margin and make it up on FSD (full self-driving) subscriptions. The math doesn’t work.”

Until FSD is able to achieve Level Four autonomy, meaning the car can drive without human interventions in almost all scenarios, FSD “take rates will remain low,” Black added.

Tesla’s price cuts 

Throughout last year, CEO Elon Musk had analysts and investors on edge with his relentless approach toward price cuts. Musk said on numerous occasions — and several times during the company’s third-quarter earnings call — that the most important hurdle for Tesla to overcome is affordability.

He blamed high-interest rates for creating that obstruction.

In 2023, the price of an average Tesla fell around 25% year-over-year, something that pushed the company’s gross margins down from 25.1% the year before, to 17.9% in the third quarter.

This week, Tesla cut the prices of its Model Y in Germany; the week before, the company cut the prices of its Model 3 and Model Y in China.

These cuts, Black said, will cost the company $1.6 billion in net income this year.

“Price cuts are a short-term sugar high that pulls forward orders from those who already own or are interested in an EV. We saw that over and over again in 2022-2023,” he said.

Tesla delivered 1.81 million units in 2023, about in-line with expectations. The company launched its highly-anticipated Cybertruck toward the end of the year. Anadolu/Getty Images

Black has been pushing Musk and Tesla to explore cheaper, alternative methods of increasing volume for months, saying regularly that an advertising campaign designed to convince the owners of gas-powered cars to make the switch to an EV would be far more valuable than price cuts.

“To accelerate the world’s transition to sustainable energy, wouldn’t it be far better to spend say $100 million to communicate directly with non-EV owners why now is a great time to switch to EVs?” he said.

Musk has said in response to such calls to advertise, that “informing people of a car is great,” but if they can’t afford it, it doesn’t help.

Black has a $300 price target on the stock, which fell a further 1% Friday morning.

As of Friday morning, every other Magnificent 7 stock, save for Amazon, was in the green.

Contact Ian with tips via email, [email protected], or Signal 732-804-1223.

Get exclusive access to portfolio managers’ stock picks and proven investing strategies with Real Money Pro. Get started now.