This “Magnificent Seven” stock will rise 120% in 2023. Here are his 2024 red flags that investors should know about.

You can’t look back on 2023 in the stock market without talking about the most powerful technology companies on the planet: the Magnificent Seven. tesla (TSLA -1.86%), Nvidia, apple, Amazon, meta platform, microsoftand alphabet. These stocks have soared between 50% and 250% this year, delivering big gains for the overall market.

It’s hard to bet on such strong momentum, but investors should keep an eye on which companies can continue to rise and which are prepared to take a step back.

Electric car standout Tesla is one candidate that is expected to see a major setback in 2024. While the long-term investment potential remains strong, the stock’s success this year hasn’t necessarily been justified, making it a potentially bad idea today.

Here’s what you need to know:

2023 was more about hype than results.

Investors tend to be forward-looking, so hype about a company’s prospects can have a direct impact on stock prices. The same thing seems to have happened with Tesla. For example, CEO Elon Musk is very vocal as the owner of social media platform X (formerly Twitter). There has been a lot of hype around some of Tesla’s emerging business products, including the Cybertruck, Tesla Bot, and advances in artificial intelligence (AI).

But Tesla’s business currently relies on sales of its existing electric vehicles: the Model S, 3, X, and Y. Tesla has resorted to aggressive price cuts to increase sales, which has a direct impact on profit margins. The operating profit margin peaked at 17% in January and has fallen by almost 6 percentage points in less than a year.

TSLA Operating Margin (TTM) Data by YCharts

There are counterarguments to this. Tesla uses price cuts as an aggressive means to increase market share and reduces costs by maximizing factory efficiency (manufacturing more units means lower costs per unit) (equivalent to lowering costs). In other words, short-term pain has long-term benefits. But I still don’t know if it will work.

My expectations have dropped…

Investors will be hoping that the decline in operating profit margins will eventually stop. At that point, volume growth should start to boost Tesla’s earnings. For now, analysts are lowering their expectations for Tesla. Expected long-term earnings growth has fallen from an average annual rate of 24% to less than 17%.

TSLA EPS LT Growth Forecast Data by YCharts

Again, it won’t stay this way (though it might). no one knows How much will Tesla cut prices, and how many more cars will it need to make and sell for its financial situation to show any signs of improving? In other words, there are risks to Tesla stock that weren’t present before the price drop.

…even though stock prices are rising

Risk typically drives stock prices down, but Tesla soared 120% in 2023. The lack of accompanying earnings growth means Tesla stock is now much more expensive than it once was. The stock is currently trading at 78 times expected earnings, while operating profit margins continue to decline.

Using the analyst estimates below, the stock’s current PEG ratio is over 4x, indicating that it is very expensive relative to expected earnings growth. His triple-digit rise in stock price feels like it’s fighting gravity, with shrinking margins and the possibility of slower revenue growth. Gravity should win in the end.

TSLA EPS LT Growth Forecast Data by YCharts

The bottom line is that investors should think twice about chasing Tesla stock at these prices. If the overall market becomes unstable in 2024, the stock is a prime candidate for a decline. All that could change if Tesla can show evidence that its strategy is working, but the stock’s valuation doesn’t have enough cushion to justify its hubris.