These “Magnificent 7” stocks are up 120% in 2023. Here are some 2024 red flags investors need to know:

No summarizing 2023 in the stock market would be complete without mentioning the ‘Magnificent Seven’ – the most powerful technology companies on the planet. tesla (TSLA -1.86%), nvidia, apologize, Amazon, meta platform, microsoftand alphabet. These stocks have surged between 50% and 250% this year, outperforming the broader market.

Although it is difficult to guarantee such strong momentum, we must pay attention to which companies will be able to continue their upward trend and which companies will retreat.

Tesla, the leader in electric vehicles, is one candidate for a significant setback in 2024. The long-term investment case remains strong, but 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 is more hype than results

Investors tend to be forward-looking, which means that hype about a company’s future potential can have a direct impact on its stock. That seems to have happened with Tesla as well. For example, CEO Elon Musk is a very vocal owner of social media platform X (formerly Twitter). There has been a lot of publicity about some of Tesla’s emerging business products, including the Cybertruck, Tesla Bot, and advancements in artificial intelligence (AI).

However, Tesla’s business currently relies on sales of its existing electric vehicles: the Model S, 3, X, and Y. Tesla relies on aggressive price cuts to boost sales, which directly impacts its profit margins. Operating profit margins, which peaked at 17% in January, have fallen nearly 6 percentage points in less than a year.

TSLA Operating Margin (TTM) data from YCharts

There is a counterargument to this. Tesla is using price cuts as an aggressive measure to increase market share and lower costs by maximizing factory efficiency (producing more units means lower costs per unit). In other words, short-term pain for long-term gain. But whether it works remains to be seen.

My expectations have fallen…

Investors will want to see a final pivot where operating margins stop declining. At that point, increased volume should begin to boost Tesla’s profits. Currently, analysts are lowering their expectations for Tesla. Long-term expected revenue growth has fallen from an average of 24% per year to less than 17%.

TSLA EPS LT Growth Estimates Data by YCharts

Again, I’m not saying it will stay like this (although it might). no one knows It’s about how much Tesla will cut prices and how many more units it will have to build and sell before it shows signs of improving its financials. That means there are risks to Tesla stock that didn’t exist before the price cut.

…while stocks rise

Risk typically drives stocks lower, but Tesla has surged 120% in 2023. The lack of accompanying earnings growth means Tesla stock is much more expensive than it used to be. The stock currently trades at a forward P/E of 78 as operating margins continue to decline.

Using analyst estimates below, the stock’s current PEG ratio is over 4, indicating it is very expensive relative to its expected earnings growth. With shrinking margins and potentially slowing revenue growth, the stock’s triple-digit gains feel like they’re fighting gravity. Battle gravity must win in the end.

TSLA EPS LT Growth Estimates Data by YCharts

The bottom line is that investors should think twice about chasing Tesla stock at these prices. The stock is a prime candidate to fall again if the broader market falters in 2024. That could all change if Tesla can show proof that its strategy is working, but there isn’t enough cushion in the stock’s valuation to justify such a leap of faith. .