Rivian (RIVN) vs. Tesla (TSLA): Can the EV Underdog Match the Giant's Success Story?

Tesla, Inc. (TSLA) accomplished what many believed to be an impossible feat by establishing itself as a prominent electric vehicle (EV) manufacturer entirely from scratch. This achievement positioned Tesla to challenge and compete with major players in the automotive industry.

Rivian Automotive, Inc. (RIVN) shares similar aspirations, aspiring to emulate TSLA’s success. However, investors eagerly anticipating Rivian’s potential to replicate Tesla’s trajectory must closely monitor whether Rivian can address significant challenges in 2024.

Establishing an automobile manufacturing company is particularly challenging due to its capital-intensive nature. This endeavor involves building extensive manufacturing facilities, procuring expensive materials, hiring a substantial workforce, and investing significant time in coordination.

Moreover, navigating regulatory requirements, especially concerning vehicle safety, adds another layer of complexity, as obtaining approvals for road-ready automobiles necessitates stringent compliance measures. Thus, the process of building an automobile manufacturer is not only laborious but also requires substantial financial resources and regulatory adherence.

It took TSLA several years before it could generate consistent profits, a milestone the company reached in 2020. Starting in 2014, Tesla experienced a notable increase in net losses, accompanied by a rise in research and development (R&D) expenses. The electric carmaker, founded in 2003, finally posted its first full year of net income of $721 million in 2020, in contrast to prior losses.

However, during this period, Tesla didn’t face significant competition in the EV market, making it the primary choice for consumers interested in EVs. This relatively unchallenged position allowed Tesla to focus on building its brand and technology without immediate pressure from its dominant peers.

In contrast, RIVN faces a more daunting challenge as it strives to achieve profitability in a market with more players and a competitive landscape different from TSLA’s early years. This means that Rivan’s journey to success is not only challenging and costly but also happening in a market environment that demands strategic adaptation and innovation.

Is Rivian on the Path to Becoming the Next Tesla?

RIVN has made significant strides toward establishing itself as a major player in the EV industry, boasting infrastructure capable of supporting its planned 2024 production target of approximately 57,000 vehicles. For the full year 2023, the company produced 57,232 vehicles and delivered 50,122, surpassing the management’s 2023 production guidance of 54,000 vehicles.

As Rivian’s production and manufacturing progress improved throughout the last year, it showcased its capacity as a legitimate automaker. Moreover, on March 7, 2024, the auto company introduced R2, R3, and R3X product lines built on its new midsize platform.

The launch of new products, including R2 and R3, designed to embody the company’s performance, capability, usability, and affordability, can bring it an expanded market reach, drive higher sales volumes, and offer a competitive edge. Rivian’s design and engineering teams are highly focused on innovating not just the product features but also its approach to manufacturing to achieve substantially reduced costs.

Despite this, Rivian still lags far behind Tesla in a critical investor metric: profitability. Rivian is far from achieving profitability, with its losses significantly exceeding those incurred by Tesla during its initial stages of developing its EV business.

In 2023, while generating substantial revenue of $4.40 billion, Rivian incurred a staggering cost of sales totaling $6.40 billion. This means that Rivian incurred losses for every EV it sold, highlighting an unsustainable business model that requires addressing for long-term viability.

The company reported a net loss of $1.52 billion for the fourth quarter that ended December 31, 2023. The last quarter of 2023 reflected a greater discrepancy between production and deliveries compared to previous quarters and recorded a 10% fall in deliveries.

Also, the company has been burning through cash to ramp up production of its product lines. As of December 31, 2023, RIVN’s cash and cash equivalents stood at $7.86 billion, compared to $11.57 billion as of December 31, 2022. Its cash burn comes at a time when demand for EVs has slowed, with Tesla CEO Elon Musk warning that high interest rates are making cars unaffordable.

“We firmly believe in the full electrification of the automotive industry, but recognize in the short-term, the challenging macro-economic condition,” said RJ Scaringe, Founder and CEO of Rivian.

Elon Musk further made remarks about RIVN’s product design, acknowledging its merit but emphasizing the company’s challenge of scaling up production while maintaining positive cash flow. He pointed out that his rival could face the risk of bankruptcy within six quarters unless significant cost reductions are implemented.

Musk emphasized the urgent need for massive cost-cutting measures to ensure the RIVN’s survival in the competitive automotive market.

Challenges Lie Ahead for Rivian in 2024

RIVN’s outlook for 2024 is influenced by economic and geopolitical uncertainties, particularly the impact of exceptionally high-interest rates. The company plans to maintain its production target at 57,000 vehicles, consistent with 2023 levels. For the full year, Rivian anticipates significant capital expenditures of $1.75 billion and an adjusted EBITDA loss of $2.70 billion.

Amid mounting losses and an increasingly competitive EV market, RIVN announced in February that it would lay off 10% of its salaried workers. Previously, on two different occasions, the EV maker laid off about 6% of its workforce in an effort to reduce its losses.

“Our business is facing a challenging macroeconomic environment — including historically high interest rates and geopolitical uncertainty — and we need to make purposeful changes now to ensure our promising future,” chief executive RJ Scaringe wrote in an email to employees.

Rivian’s cash burn is one of the primary challenges for the company. Its cash burn is unsustainable as it expands R2 and R3 capacity, prompting management to announce a reduction in capital expenditures, specifically in Georgia. Last month, Rivian announced that it would be pausing the construction of its $5 billion manufacturing plant in Georgia to cut down costs.

CEO RJ Scaringe said that production of the R2 will begin at RIVN’s existing plant in Normal, Illinois. While presented as a cost-saving initiative, the decision raises concerns regarding the company's ability to manage its operations effectively.

Bottom Line

RIVN has made significant strides in establishing itself as a major player in the EV industry. The company’s infrastructure supports its ambitious production targets, and the introduction of new product lines like R2 and R3 showcases its commitment to innovation and market expansion. These moves can potentially drive higher sales volumes and enhance its competitive edge.

However, Rivian faces substantial challenges, particularly in achieving profitability. Despite generating decent revenue, the company’s cost of sales has resulted in significant losses, raising questions about the sustainability of its business model. The company’s cash burn is a pressing concern.

While Rivian has shown promise in its technological advancements and product offerings, its path to profitability and long-term viability hinges on its ability to address its cost structure, manage cash flow effectively, and navigate a challenging macroeconomic environment in the EV industry, including high interest rates, supply chain disruptions, and intensified competition.

So, it’s crucial to emphasize that investors should focus on Rivian’s execution toward profitability in 2024. While a shift from losses to profits is significant, consistent progress toward that turning point will determine Rivian’s potential to match Tesla’s success. Investors should also closely monitor Rivian’s efforts to improve operational efficiency and manage costs effectively.

If Rivian can demonstrate steady progress toward profitability, there’s still a chance it could match its rival Tesla’s some of the success achieved. However, given its massive losses, alarming cash burn, and an uncertain outlook, it could be wise to approach RIVN with caution for now.

Google’s AI Debacle: A Red Flag for Investors Eyeing Sell Signals?

Since the debut of OpenAI’s ChatGPT in November 2022, numerous tech companies have been swiftly advancing to develop comparable, if not superior, versions of such conversational AI models. Among them, tech titan Alphabet Inc. (GOOGL) has emerged as a prominent player.

Utilizing its extensive resources and employing top-tier talent to explore the frontiers of AI capabilities, GOOGL unveiled its largest and most capable AI model, Gemini (formerly known as Bard), in December last year.

This expansive language model consists of three variants: Gemini Ultra, representing its largest and most proficient category; Gemini Pro, designed to address a wide range of tasks across various scales; and Gemini Nano, tailored for specific functionalities and compatibility with mobile devices.

GOOGL’s CEO Sundar Pichai said this new era of models signifies one of the company's most significant science and engineering endeavors. He expressed genuine excitement about the future and the opportunities Gemini will bring to individuals worldwide.

However, despite the CEO’s enthusiasm, Gemini failed to garner the same level of traction as ChatGPT. According to web analytics company Similarweb, Gemini currently ranks as the third most popular AI chatbot, trailing significantly behind ChatGPT in terms of traffic.

To make matters worse, Gemini has encountered multiple controversies over the last month, resulting in a notable downturn for GOOGL. According to the Gemini chatbot, one should never misgender a person, even if it could prevent a nuclear apocalypse.

This stance was revealed in response to a hypothetical question posed by a popular social media account, which asked if misgendering Caitlyn Jenner, a prominent transgender woman, could prevent such a catastrophe. Gemini’s “woke” response to the post received major criticism from social media users.

Additionally, the controversy surrounding Google’s Gemini intensified as its image-generating platform was slammed for producing racially inaccurate depictions of historical figures, occasionally substituting images of White individuals with those of Black, Native American, and Asian descent.

Tesla, Inc. (TSLA) CEO Elon Musk expressed concern over these “woke” responses, particularly emphasizing the widespread integration of Gemini across GOOGL’s products and YouTube.

Musk tweeted about a conversation with a senior GOOGL executive, who informed him it would take a few months to address the issue, contrary to earlier expectations of a quicker resolution.

While GOOGL has issued several apologies and halted the use of Gemini’s image-generating platform, a former GOOGL executive disclosed that investors are expressing profound frustration as the scandal involving the Gemini model evolves into a tangible threat to the tech company.

On the other hand, CEO Sundar Pichai reassured stakeholders, affirming that the company is actively working “around the clock” to address the issues with the AI model. Pichai condemned the generated images as “biased” and “completely unacceptable.”

Furthermore, GOOGL recently introduced an update to Gemini that allows users to modify inaccurate responses and provides them with increased control over the platform. Reportedly, GOOGL experienced a loss of approximately $90 billion in market value last month, fueled by the controversy surrounding Gemini.

Also, GOOGL made history as the first company to face a hefty fine for its AI training methods. French regulators imposed a penalty of approximately $270 million on the tech giant. The regulatory authority stated that the company breached a pledge by using content from news outlets in France to train its generative AI model, Gemini.

Bottom Line

As GOOGL grapples with the fallout from Gemini-related controversies, its reputation among investors has taken a significant blow. The company’s AI chatbot faced enhanced backlash from individuals and prominent public figures such as Elon Musk.

Sergey Brin, the co-founder of GOOGL, acknowledged Gemini's historical inaccuracies and questionable responses. He stated that Google “definitely messed up on the image generation” and attributed the issue to insufficient testing.

However, he highlighted that GOOGL is not alone in grappling with challenges. Various AI tools, including ChatGPT and Elon Musk’s Grok services, struggle to generate accurate results. He noted that these tools sometimes produce peculiar responses that may seem politically skewed.

Despite these challenges, Brin maintains confidence in GOOGL’s position, emphasizing his belief in the tech company’s capabilities to adapt and innovate its business models.

Furthermore, GOOGL continues to lead the way in the field of AI. Talks between GOOGL and Apple Inc. (AAPL) about integrating Gemini’s generative AI technology with iPhones have sparked a significant surge in the stock prices of both companies.

A partnership with AAPL would give GOOGL and Gemini a reassuring vote of confidence, particularly given the recent controversies surrounding its “woke” chatbot and the generation of inaccurate images.

Wedbush analyst Scott Devitt sees the potential deal as a validation moment for GOOGL’s generative AI positioning. The firm rates GOOGL “outperform” and has a 12-month price target of $160. Devitt emphasized that this collaboration represents a significant opportunity for GOOGL to integrate into the AAPL ecosystem.

In conclusion, while GOOGL faces challenges and scrutiny due to controversies surrounding Gemini, the company continues demonstrating determination to adapt and thrive.

Furthermore, talks with AAPL regarding the potential integration of Gemini's technology signal promising opportunities for GOOGL and its generative AI model. Consequently, in light of this significant development, adopting an entirely bearish stance on GOOGL might not be prudent. Thus, investors could closely monitor the stock for potential gains.

Buy Alert: Is Ford (F) Entering a New EV Era?

In recent years, the automotive industry has witnessed a seismic shift towards electric vehicles (EVs), fueled by both environmental concerns and technological advancements. One company that has been at the forefront of this transition is Ford Motor Company (F).

Traditionally known for its robust lineup of combustion engine vehicles, F’s foray into the EV market has been met with both skepticism and anticipation. However, recent developments suggest that F might be poised to make a significant impact in the EV space, potentially ushering in a new era for the iconic automaker.

Over the past few years, F has worked relentlessly to capture the EV market by launching several EV models. Beginning with the electrification of its most iconic products, the Mustang, F-150, and Transit, F rapidly ascended to become the second-largest EV brand in the U.S. by 2022.

Beyond simply providing zero-emission variants of its top-selling vehicles, the company is leveraging electrification to enhance the qualities that customers cherish most: performance, capability, and productivity. F’s strategy for electrification serves as a cornerstone in the company’s broader mission to achieve worldwide carbon neutrality by the year 2050.

In addition, in 2022, the company bifurcated its EV and traditional business into two distinct units, providing investors with greater transparency into its operations. The EV division was branded as “Ford Model e,” while the conventional operation retained the name “Ford Blue.”

However, despite F’s ambitious visions, the company’s EV division has grappled with major losses. In the fourth quarter of 2023, F’s EV division “Ford Model e” posted a $1.57 billion loss, more than doubling a loss of $631 million during the fourth quarter of 2022. Meanwhile, the company’s top-line and bottom-line figures for the same quarter topped Wall Street estimates.

While discussing the losses from its EV unit during the earnings call, F’s CEO Jim Farley highlighted a pivotal lesson learned. He noted that scaling EVs from 5,000 to 7,000 units per month and entering the early majority customer segment unveiled customers’ reluctance to pay a substantial premium for EVs.

However, in light of the significant losses incurred by its EV segment and customers’ unwillingness to pay premium prices, F’s teams are unwaveringly dedicated to prioritizing cost-effectiveness and efficiency in their EV products. This strategic focus is aimed at competing effectively with more affordable models from Tesla, Inc. (TSLA) and Chinese automakers.

Farley further added that F is reconsidering its strategies regarding EVs. The automaker had previously announced its intention to delay or reduce spending by $12 billion on all-electric vehicles. He emphasized that while F remains committed to the growth of EVs, widespread adoption among mass-market consumers is unlikely until the costs are comparable to traditional vehicles.

As F scales back and reassesses its EV business, it plans to focus more on the sales of hybrid vehicles, particularly trucks. The company anticipates a 40% increase in hybrid sales this year, having sold 133,743 hybrid vehicles in the U.S. in 2023.

Apart from F’s cost-cutting measures to make its EV models cheaper for its customers, the company has further taken significant measures to bolster its EV sales. A recent notable move involves tapping into TSLA’s Supercharger Network, enabling F car owners to conveniently charge their vehicles using TSLA's North American Charging Standard (NACS) plug.

Furthermore, F is offering a complimentary charging adapter to owners of 2021 through 2024 F EV models until June 30, 2024. Following this deadline, customers can acquire the adapter from F for $230.

Also, the forthcoming generation of F EVs will come equipped with NACS plugs straight from the factory, ensuring seamless access to the TSLA Superchargers Network. CEO Farley emphasized that this initiative enhances the public charging experience, offering customers increased choice and playing a crucial role in F’s evolution as an EV brand.

On top of it, F announced its acquisition of Auto Motive Power (AMP), a startup specializing in electric charging technology and battery management software. This strategic move aims to overhaul F's charging infrastructure and reduce the costs associated with its electric vehicles.

Analysts forecast for Ford’s first-quarter earnings reveal a mixed outlook, projecting a 21% year-over-drop in its EPS, reaching $0.56. The company’s revenue, on the other hand, is anticipated to increase 8.2% year-over-year to $42.28 billion.

Bottom Line

Despite the challenges being faced by its EV business, it’s crucial to acknowledge F’s significant advancements in the EV market. By prioritizing the enhancement of performance and productivity, F’s initiatives are in alignment with global carbon neutrality goals.

These strides underscore F’s steadfast commitment to innovation and sustainability within the automotive industry, highlighting resilience amidst the obstacles encountered in its EV segment.

Moreover, F’s proactive measures to enhance EV sales through price reductions and cost-saving initiatives are yielding tangible results, marking a promising trajectory for the company's EV endeavors.

Following an 11% year-over-year decline in January EV sales, F witnessed a notable turnaround in February. In February, F delivered 6,368 electric vehicles, marking an impressive 80.8% increase compared to the previous year. Specifically, sales of its Mustang Mach-E model surged by 64.3% year-over-year, with 2,930 units sold in February.

Furthermore, by tapping into TSLA’s Supercharger Network, F is addressing a critical concern among EV owners regarding charging infrastructure, enhancing convenience and accessibility for its customers.

The National Renewable Energy Laboratory (NREL) revealed that the United States has only reached 3.1% of its 2030 goal for DC fast chargers without the inclusion of the TSLA’s Supercharger Network. However, when factoring in the TSLA’s Supercharger Network, this figure rises to 9.1% of the nation’s target.

As highlighted by TSLA upon the official opening of the Supercharger Network to F’s electric vehicles, the network is expanding rapidly, with the addition of one new stall every hour. Considering the domination of TSLA’s Supercharger Network, the collaboration between TSLA and F could be a pivotal step in bolstering F’s EV sales.

Additionally, F’s strategic acquisition of AMP has demonstrated the company's dedication to advancing charging technology and reducing costs associated with electric vehicles.

F also remains steadfast in its commitment to returning value to its shareholders through dividend distributions. On March 1, the company paid a quarterly dividend of $0.15 to its shareholders. The company’s annual dividend of $0.60 translates to a 4.85% yield on the prevailing price level, while its four-year average dividend yield is 4.83%.

Overall, F’s strategic initiatives and promising developments in the electric vehicle market could position the company for long-term success in the rapidly evolving EV landscape, enhancing its competitiveness and brand loyalty. To that end, investors could closely monitor this stock for potential gains.

Decoding Pharma Stocks: Analyzing the Buy Potential of MDGL, MRK, and LLY

Despite the pharmaceutical industry’s reputation for resilience amid economic turbulence, investments in pharmaceutical companies have dipped below historical levels over the past two years.

However, rising U.S. Food and Drug Administration (FDA) approvals, the increasing number of chronic diseases, and robust demand for the latest innovative weight-loss drugs have heightened the industry’s allure among investors. In 2023, the FDA approved almost 50% more novel drugs compared to 2022, restoring approval rates to historical levels.  

Meanwhile, approvals for innovative therapies featuring an active ingredient or molecule not previously sanctioned increased to 55 in 2023, a rise from 37 in 2022 and 51 in 2021. Analysts and investors believe these improvements could potentially trigger increased investments in firms operating in the industry.

Furthermore, the huge demand for the industry’s latest groundbreaking weight loss drug could prove to be highly profitable for the industry in the forthcoming years. Goldman Sachs analysts project that the number of U.S. adults utilizing obesity medications will reach a staggering 15 million by the year 2030.

Given such robust demand, drug-manufacturing companies are racing to enter the lucrative market of widely sought-after weight loss drugs that could accrue a value of tens of billions within a decade.

Buoyed the bright industry prospects, during the fourth quarter of 2023, family offices representing billionaire Waltons and George Soros made their mark in the biotechnology sector, enticed by the growing appeal of drug developers among affluent investors.

Soros Fund Management capitalized on this trend by acquiring a new stake worth $19.20 million in Eli Lilly and Company (LLY) and also made a significant investment of $24.50 million in Merck & Co., Inc. (MRK). Meanwhile, the Walton Investment Team secured a $8.20 million position in Madrigal Pharmaceuticals, Inc. (MDGL).

Therefore, let’s analyze why LLY, MRK, and MDGL could be potential buys.

Eli Lilly and Company (LLY)

Boasting a market cap of over $700 billion, pharma giant LLY has captured the spotlight, drawing attention from both retail and institutional investors alike. This fervor stems from the resounding success of its revolutionary weight-loss drugs, Mounjaro and Zepbound.  

Within a year of initiating treatment for obesity, 42.3% of individuals receiving tirzepatide, the key component in Mounjaro and Zepbound, experienced a weight loss of at least 15%. Responding to the high demand for these weight-loss medications, LLY launched its direct-to-consumer (DTC) platform named "LillyDirect" last month.

Through this website, individuals can directly order from the pharmaceutical company, including its weight-loss medication Zepbound, and access connections with telehealth companies for conditions like obesity.

Moreover, the company’s fourth-quarter performance revealed solid growth in both topline and bottom-line figures. Its total revenue reached $9.35 billion, reflecting a 28.1% year-over-year surge.

Notably, revenue from Mounjaro, LLY’s top-selling product, witnessed a staggering 689.9% year-over-year rise, underscoring the solid demand for the drug. Meanwhile, Zepbound, which was launched in November 2023, registered a revenue of $175.80 million.

In light of the overwhelming demand for its weight-loss pipeline, LLY's market capitalization surged, surpassing that of Tesla, Inc. (TSLA), thereby solidifying its position among the top 10 most valuable companies in the S&P 500 Index.

The stock’s relentless success has sparked speculation among analysts about the possibility of it becoming the first biopharmaceutical company to reach a market value of $1 trillion.

Such considerable advances, along with the LLY’s addition to Soro Fund’s equity portfolio, signify a robust endorsement of confidence in the company.

Merck & Co., Inc. (MRK)

With a strong market cap of over $323 billion and a roughly 24% surge in its shares over the past three months, a global healthcare company, MRK offers a diverse range of human health pharmaceutical products spanning oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, and diabetes.

In its most recent earnings, the company's top-selling cancer drug Keytruda generated a remarkable revenue of $6.61 billion, up 21% year-over-year, while its HPV vaccine Gardasil brought in an impressive $1.87 billion in revenue, reflecting a 27% year-over-year rise.

MRK’s Chairman and Chief Executive Officer, Robert M. Davis, expressed immense satisfaction with the company's performance throughout last year. He highlighted MRK's significant reach, with its medicines impacting over 500 million people. Additionally, the company invested approximately $30 billion in research and development last year to drive forward the discovery and development of impactful innovations in collaboration with others.

With oncology as its primary focus, MRK recently announced its decision to acquire Harpoon Therapeutics, Inc. for an approximate total equity value of $680 million. This strategic move is anticipated to complement MRK’s existing portfolio and drive forward innovative scientific breakthroughs to serve individuals better worldwide battling cancer.

On top of it, the company is actively exploring avenues to diversify its product portfolio and could possibly venture into the burgeoning market of weight-loss drugs.

Its experimental GLP-1 drugs, initially developed to treat non-alcoholic fatty liver disease, have shown unforeseen indications of weight loss. Alongside targeting weight loss, the pharmaceutical company is also pursuing therapies that provide benefits for diabetes and other disorders.

Soros Fund's investment in MRK could bolster the pharma company’s growth strategies and R&D initiative. The investment signals its confidence in MRK’s performance and prospects. Furthermore, MRK's exceptional track record of dividend payouts may infuse more investor confidence in its stock performance.

Madrigal Pharmaceuticals, Inc. (MDGL)

MDGL is a pre-revenue clinical-stage pharmaceutical company developing novel drugs to address major unmet needs in cardiovascular, metabolic, and liver diseases. Over the past six months, the stock has jumped over 27%.

The company’s lead compound, resmetirom, is being advanced for non-alcoholic steatohepatitis (NASH), a liver disease that commonly affects people with metabolic diseases such as obesity and diabetes, and non-alcoholic fatty liver disease (NAFLD).


MDGL’s positive findings from the Phase 3 MAESTRO-NASH trial last year November demonstrate the potential effectiveness of resmetirom in treating NASH with liver fibrosis, addressing a critical unmet medical need. It is also close to being commercialized. These promising results could not only validate the company's research and development efforts but also have the potential to bolster investor confidence.

MDGL’s latest quarterly report revealed losses of $98.74 million and $5.44 per share, while its research and development expenses rose 3.9% year-over-year. Nevertheless, analysts foresee the company experiencing a final loss in fiscal year 2024 before rebounding with positive profits of $57 million in fiscal year 2025.

Also, as of September 30, 2023, its cash and cash equivalents stood at $62.06 million. However, total operational costs outpaced this liquidity by reaching $263.32 million, of which a significant $201.71 million was research and development expenses.

The company's financial capabilities may hinder certain research initiatives along with corresponding clinical expenses and curtail investment in commercial readiness. This could necessitate fundraising efforts to propel R&D or even propel commercialization strategies for its pharmaceutical product lines.

So, Walton Investment's stake in MDGL serves as a strong endorsement of the pharma giant's potential and growing portfolio. This move undoubtedly bolsters the standing of MDGL’s stocks in the market.

Bottom Line

Overall, the pharmaceutical industry remains dynamic, with companies deftly maneuvering evolving market trends and seizing opportunities for growth and innovations. Thus, investors could consider keeping an eye on the shares of LLY, MRK, and MDGL for potential gains.

Is It Time to Rethink Investing in the Magnificent 7 Stocks?

The largest companies in the S&P 500 Index have witnessed “unrelenting” outperformance over the past decade. However, history shows that mega-cap stocks typically fail to keep up their market-beating run, as per the asset allocation team at Jeremy Grantham’s GMO, an investment management firm.

By some measures, “big is generally anything but beautiful,” GMO’s co-head of asset allocation, Ben Inker and team member John Pease, said in the investment firm’s first-quarter 2024 letter to clients. “Nine of the top 10 have underperformed on average.”

The biggest stocks usually become the biggest by “way of becoming expensive, and this anti-value tilt has historically been quite costly, explaining most of these companies’ poor relative returns,” said Ben Inker and John Pease. “Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year.” 

“But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average,” they wrote.

Magnificent And Concentrated

According to the GMO team, the S&P 500 has become an increasingly concentrated index over the past decade, with the top seven stocks, Microsoft Corporation (MSFT), Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), Meta Platforms, Inc. (META), and Tesla, Inc. (TSLA), now have surged to 28% of the total, from 13% a decade ago, as their returns are outpacing that of the average stock in the index.

These Big Tech stocks, also known as the Magnificent Seven, are being closely watched by investors after skyrocketing in 2023.

“Biasing portfolios against the very largest stocks” over the past decade has been “a disaster,” particularly last year; however, it’s been “lucrative” for most of history, as per the GMO letter. 

Despite recent trends indicating their continued growth and resilience, betting against mega-cap stocks or engaging in short selling or other strategies that profit from a decline in the stock prices of these largest companies has historically been considered a profitable strategy for reasons including valuation concerns, market cycles and mean reversion, and regulatory and antitrust risks.

“The break in the consistent downward trend of cap-weighted underperformance reflects the magnificence of the Magnificent Seven,” the letter stated.  “In 2023, as their monicker became part of the common lexicon, they outperformed the S&P 500 by an almost unimaginable 60%.”

The S&P 500 index gained about 24.2% in 2023, climbing on the back of Big Tech’s gains. Big Tech stocks’ gains were primarily driven by immense investor enthusiasm surrounding AI.

The broad S&P 500 index briefly crossed 5,000 during intraday for the first time in history last Thursday, and on Friday, it ended above the level, marking its tenth record close of 2024 at 5,026. That puts the stock market benchmark up more than 5% since the start of the year, on top of its impressive 24% gain last year.

“As far as mega caps go, they have been practically unparalleled in their outperformance” over the past decade, but 2022 was the only year when they failed to outperform the market, added Inker and Pease. In 2022, the Magnificent Seven saw significant losses of nearly 40%, mainly due to monetary tightening and interest rate hikes that adversely impacted tech-related stocks.

“This performance came in part from the unusual cheapness of mega caps at the start of the decade,” as per the letter. For instance, Apple, Microsoft, and Google boasted a combined P/E ratio of 15x in 2013; in contrast, the market’s P/E was around 25% higher.

Also, these companies managed to grow earnings “at a breakneck pace.” Inker and Pease said, “Microsoft and Amazon did so by reinventing themselves. Apple, Alphabet, Meta, Nvidia, and Tesla took over their primary industries. The medium-sized businesses among them became huge, and the large ones became giants.” 

“Ten years ago, the index was more than twice as diversified,” they wrote. “We have never seen – over any 10-year period – a decline (or increase) in diversification of the magnitude we have just witnessed.”

Comprehensive Analysis of the Magnificent Seven Stocks:

Microsoft Corporation (MSFT)

With a market cap of $3.02 trillion, Microsoft is a leading software company that operates through Productivity and Business Processes; Intelligent Cloud; and More Personal Computing segments.

In terms of forward non-GAAP P/E, MSFT is trading at 35.03x, 36.1% higher than the industry average of 25.74x. The stock’s forward Price/Sales of 12.46x is 319.8% higher than the industry average of 2.97x. Likewise, its forward Price/Book of 11.28x is 172.2% higher than the industry average of 4.15x.

MSFT is considered relatively expensive by some valuation metrics compared to its industry peers. But it’s essential to consider that what might appear costly based on traditional valuation metrics may be justified by the company’s solid fundamentals, growth trajectory, and competitive advantages.

During the fiscal 2024 second quarter that ended December 31, 2023, MSFT’s total revenue came in at $62.02 billion, beating the analysts’ estimate of $61.13 billion. That was up 17.6% from the previous year’s quarter. Its gross margin grew 20.2% from the year-ago value to $42.40 billion.

In addition, the company’s operating income increased 32.5% year-over-year to $27.03 billion. Its net income rose 33.2% from the prior year’s period to $21.87 billion. Microsoft reported earnings per share of $2.93, compared to the consensus estimate of $2.20, and up 33.2% year-over-year.

For the third quarter of 2024, Microsoft expects revenue between $60 billion and $61 billion. The software maker sees lower-than-expected cost of revenue and operating expenses during the quarter.

Analysts expect MSFT’s revenue and EPS for the third quarter ending March 2024 to increase 15.2% and 15.5% year-over-year to $60.87 billion and $2.83, respectively. Further, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 14.2% and 13.7% from the previous year to $278.98 billion and $13.29, respectively.

Shares of MSFT have surged nearly 26% over the past six months and more than 50% over the past year.

Apple Inc. (AAPL)

AAPL is a leading tech company with a market cap of $2.84 trillion. Its primary products and services include iPhone, Mac, iPad, Apple Watch, and digital services, such as the App Store, Apple Music, Apple TV+, and AppleCare, among others.

In terms of forward non-GAAP P/E, AAPL is trading at 28.10x, 9.1% higher than the industry average of 25.74x. Its forward EV/Sales of 7.15x is 141.4% higher than the industry average of 2.96x. Also, its forward Price/Sales of 7.32x is 146.8% higher than the industry average of 2.97x.

Along with valuation metrics, determining whether AAPL is expensive or cheap requires analysis of other factors, such as growth prospects and market conditions.

AAPL’s net sales increased 2.1% year-over-year to $119.58 billion in the fiscal 2024 first quarter that ended December 30, 2023. Its operating income grew 12.1% year-over-year to $40.37 billion. The tech giant’s net income and earnings per share came in at $33.92 billion and $2.18, up 13.1% and 16% from the prior year’s period, respectively.

“Today Apple is reporting revenue growth for the December quarter fueled by iPhone sales, and an all-time revenue record in Services,” said Tim Cook, Apple’s CEO, in its last earnings release. “We are pleased to announce that our installed base of active devices has now surpassed 2.2 billion, reaching an all-time high across all products and geographic segments.”

Street expects AAPL’s revenue and EPS for the fiscal year (ending September 2024) to grow 1.4% and 6.9% year-over-year to $388.47 billion and $6.55, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 6.2% and 9% from the prior year to $412.46 billion and $7.14, respectively.

AAPL’s stock has gained more than 6% over the past six months and approximately 18% over the past year.

NVIDIA Corporation (NVDA)

NVDA, with a $1.80 trillion market cap, NVDA is a prominent tech company that specializes in graphics processing units (GPUs), AI, and semiconductor technologies. It serves the gaming, data center, automotive, and professional visualization industries.

NVDA’s forward non-GAAP P/E of 58.79x is 127.5% higher than the 25.85x industry average. Moreover, the stock’s forward Price/Sales and Price/Book multiples of 30.33 and 40.86 are significantly higher than the respective industry averages of 2.99 and 4.17. NVIDIA is trading at a premium relative to its industry peers.

If NVDA’s growth prospects are strong, investors may be willing to pay a premium for the stock despite its higher valuation multiples.

During the fiscal 2024 third quarter ended October 29, 2023, NVIDIA posted a record revenue of $18.12 billion, an increase of 206% from the prior year’s period. Its non-GAAP operating income rose 652% year-over-year to $11.56 billion. Also, the company’s non-GAAP net income and non-GAAP EPS were $10.02 billion and $4.02, up 588% and 593% year-over-year, respectively.

For the fiscal year ending January 2024, the consensus revenue and EPS estimates of $59.18 billion and $12.36 indicate an improvement of 119.4% and 270.1% year-over-year, respectively. Further, analysts expect NVDA’s revenue and EPS for the fiscal year 2025 to increase 58.2% and $21.18 year-over-year to $93.60 billion and $21.18, respectively.

The stock has climbed more than 65% over the past six months and 218% over the past year.

Alphabet Inc. (GOOGL)

With a market cap of $1.78 trillion, GOOGL is a tech giant renowned for its internet-related products and services. Its business segments include Google Services; Google Cloud; and Other Bets. The company continues to maintain its dominance in the global online search market, boasting more than 90% market share, according to SimilarWeb data.

In terms of forward non-GAAP P/E, GOOGL is trading at 21.11x, 37.7% higher than the industry average of 15.33x. The stock’s forward Price/Sales of 5.18x is 315% higher than the industry average of 1.25x. Similarly, its forward Price/Book of 5.19x is 152.9% higher than the industry average of 2.05x. In addition to valuation metrics, assessing GOOGL’s growth prospects is crucial.

In the fourth quarter that ended December 31, 2023, GOOGL’s revenues increased 13.5% year-over-year to $86.31 billion. Its operating income grew 30.5% from the year-ago value to $23.70 billion. In addition, the company’s net income and EPS rose 51.8% and 56.2% from the prior year’s quarter to $20.69 billion and $1.64, respectively.

Street expects GOOGL’s revenue for the fiscal year 2024 to increase 11.4% year-over-year to $342.41 billion. Likewise, the consensus EPS estimate of $5.75 for the current year indicates a 16.6% rise from the prior year. Moreover, the company surpassed its consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Furthermore, the tech company’s revenue and EPS are estimated to grow 10.5% and 15.5% year-over-year to $378.35 billion and $7.81, respectively, for the fiscal year ending December 2025.

GOOGL’s shares are up more than 10% over the past six months and nearly 45% over the past year.

Amazon.com, Inc. (AMZN)

With a market capitalization of $1.76 trillion, AMZN has grown to become one of the most influential tech companies, offering a wide range of products and services in areas including e-commerce, cloud computing, digital streaming, and AI. Its products and services include amazon.com, the world’s largest online retailer; Amazon Web Services (AWS); Amazon Prime, a subscription service; and more.

Amazon is relatively expensive compared to its industry peers. AMZN’s forward non-GAAP P/E of 40.50x is 155.3% higher than the 15.87x industry average. The stock’s forward Price/Sales and Price/Book multiples of 2.75 and 6.36 are considerably higher than the respective industry averages of 0.95 and 2.66.

Now, let’s talk about the company’s growth prospects. AMZN’s total net sales increased 13.9% year-over-year to $169.96 billion for the fourth quarter that ended December 31, 2023. Its operating income grew 382.6% from the year-ago value to $13.21 billion. The company’s net income and EPS significantly grew year-over-year to $10.62 billion and $1, respectively.

Analysts expect AMZN’s revenue for the fiscal year 2024 to increase 11.6% year-over-year to $641.44 billion. The company’s EPS for the ongoing year is expected to grow 44.6% from the previous year to $4.19. Also, the company topped consensus revenue and EPS estimates in each of the trailing four quarters.

AMZN’s stock has surged nearly 23% over the past six months and more than 65% over the past year.

Meta Platforms, Inc. (META)

Formerly known as Facebook, Inc., META, with a market cap of $1.23 trillion, is a technology conglomerate with key products, including Facebook, Instagram, WhatsApp, and Messenger. 

In terms of forward non-GAAP P/E, META is trading at 28.10x, 9.1% higher than the industry average of 25.74x. Its forward EV/Sales of 7.15x is 141.4% higher than the industry average of 2.96x. Also, its forward Price/Sales of 7.32x is 146.8% higher than the industry average of 2.97x.

META posted revenue of $39.17 billion for the fourth quarter that ended December 31, 2023, up 24.7% year-over-year. Its income from operations rose 156% year-over-year to $16.38 billion. Its net income grew 201.3% from the year-ago value to $14.02 billion. The company reported earnings per share attributable to Class A and Class B common stockholders of $5.33, up 202.8% year-over-year.

For the first quarter of 2024, META expects total revenue to be in the range of $34.50-37 billion. For the full year 2024, the management expects total expenses to be in the range of $94-99 billion, unchanged from the prior outlook.

Street expects Meta’s revenue and EPS for the fiscal year (ending December 2024) to grow 17.4% and 32.4% year-over-year to $158.39 billion and $19.69, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 12.2% and 15.2% from the previous year to $177.68 billion and $22.96, respectively.

The stock has gained approximately 45% over the past three months and more than 170% over the past year.

Tesla, Inc. (TSLA)

With a $638.39 billion market cap, TSLA designs, develops, manufactures, leases, and sells electric vehicles (EVs) and energy generation and storage systems internationally. The company operates in two segments: Automotive; and Energy Generation and Storage. 

In terms of forward non-GAAP P/E, TSLA is trading at 62.61x, 294.6% higher than the industry average of 15.87x. The stock’s forward Price/Sales of 5.75x is 507.9% higher than the industry average of 0.95x. Likewise, its forward Price/Cash Flow of 48.16x is 282.9% higher than the industry average of 10.54x. Along with valuation metrics, assessing TSLA’s fundamentals and growth prospects is essential.

During the fourth quarter that ended December 31, 2023, TSLA’s revenues decreased 3% year-over-year to $25.17 billion. Its income from operations declined 47% from the year-ago value to $2.06 billion. Its adjusted EBITDA was $3.95 billion, down 27% from the prior year’s period.

In addition, the company’s non-GAAP net income and EPS declined 39% and 40% from the prior year’s quarter to $2.49 billion and $0.71, respectively. But its free cash flow came in at $2.06 billion, an increase of 45% year-over-year.

Analysts expect TSLA’s revenue for the first quarter (ending March 2024) to increase 9.3% year-over-year to $25.49 billion. However, the consensus EPS estimate of $0.68 for the current quarter indicates a 20.5% decline year-over-year. Additionally, the company missed consensus revenue and EPS estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year 2024, the company’s revenue and EPS are expected to grow 14.7% and 2.6% from the prior year to $110.97 billion and $3.20, respectively. TSLA’s shares have surged nearly 20% over the past nine months.

Bottom Line

Over the past decades, mega-cap stocks have demonstrated periods of outperformance and underperformance, reflecting several shifts in market dynamics and economic conditions.

While the largest companies in the S&P 500 have seen “unrelenting” outperformance over the past decade, history shows the biggest stocks generally fail to keep up their market-beating run. Citing data from 1957-2023, co-head of asset allocation Ben Inker and team member John Pease found that nine of the ten largest S&P 500 stocks underperformed on average.

“The historical underperformance of the top 10 comes down to the two main sources of return – valuation expansion and fundamental growth – being harder to achieve than for your average company. The largest stocks generally become the largest by way of becoming expensive, and this anti-value tilt has historically been quite costly, explaining most of these companies’ poor relative returns,” Inker and Pease wrote.

Since 1957, the ten biggest stocks in the S&P 500 underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. However, the last decade seems to notably depart from that downtrend, with the largest ten outperforming by an impressive 4.9% per year on average.

So far, in 2024, the following four stocks in the Magnificent Seven are beating the S&P 500: Nvidia, Meta, Amazon, and Microsoft.

For investors considering buying, holding, or selling the Magnificent Seven stocks, it is crucial to assess each stock individually based on its fundamentals, valuation, growth prospects, and risk factors.