Tesla at Risk of Losing "Tech Titans" Status?

Despite Tesla's impressive Q3 earnings report last week, which led to a significant increase of about 22% on Thursday, marking the best single-day performance in 11 years, the market is now returning to rationality as Wall Street assesses whether the stock should be included in the "Tech Titans."

The current members of the "Tech Titans" include Nvidia, Apple, Google's parent company Alphabet, Amazon, Meta, Microsoft, and Tesla. They have been the dominant forces in the U.S. stock market for a considerable period.

As the Q3 earnings season approaches, the "Titans" are once again poised to be potential key drivers. According to FactSet, the "Tech Titans" are expected to lead the market with a year-over-year growth rate of 18.1% in the third quarter, with four stocks—Nvidia, Alphabet, Amazon, and Meta—projected to be among the top 10 contributors to the S&P 500's earnings growth.

Although Tesla's profits rebounded in the third quarter, concerns continue to persist, and the debate around Tesla has once again resurfaced. Tesla's third-quarter profits soared by 17%, achieving a dramatic turnaround after two consecutive quarters of decline. However, this seems to be far from sufficient for Wall Street.

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Wall Street strategists believe that due to overhyped fundamentals, the stock still runs the risk of lagging behind other large-cap tech stocks.

Jay Woods, Chief Global Strategist at Freedom Capital Markets, the investment banking division of Prime Executions, Inc., likens Tesla to Bitcoin, implying that Tesla's stock trading is more based on "hope and dreams" rather than fundamentals.

He warns, "Tesla has had its moments of glory... In my view, it's more like Cisco or Intel during the internet bubble era, and now we're moving on to other things."

Although CEO Elon Musk often categorizes Tesla as a technology company, the company's bets on artificial intelligence and robotics may take years to yield returns. In the meantime, Tesla must rely on improving its core automotive business, which is in stark contrast to the other members of the "Tech Titans."

Long-term tech stock investor Dan Morgan said, "I've been in the tech industry since 1990, and I remember the 'Four Horsemen'... We did not include automotive stocks in our portfolio of Cisco, Intel, Dell, and Microsoft."

Tesla's recent poor performance and high valuation further weaken its position among the Titans. Data shows that the company's forward price-to-earnings ratio is close to 73 times, far exceeding the other members of the "Tech Titans."Additionally, as of last Friday afternoon, only over 40% of analysts studying Tesla rated the stock as "buy," making Tesla the least favored stock among the seven giants by analysts.

Netflix's "Rise"

As for Tesla's replacement, Wall Street seems to have reached a consensus: Netflix has become a strong contender.

Wealth Enhancement Group analyst Ayako Yoshioka pointed out that Netflix is "the most meaningful" because the company's stock price recently hit a historical high driven by strong earnings and solid guidance.

Since the beginning of this year, the stock has risen by 61.08%, second only to Nvidia and Meta.

Portfolio Wealth Advisors' Jesus Alvarado-Martinez also said that being one of the seven giants means being a "cash flow machine," and Netflix "meets this requirement."

He said, "Netflix's free cash flow has been continuously increasing... considerable profits, considerable free cash flow, and considerable user numbers."

Since the outbreak of the pandemic, the company's free cash flow has steadily climbed, reaching $2.19 billion in the third quarter, higher than the $1.89 billion in the same period last year. In 2023, its total free cash flow was $6.93 billion, compared to $1.62 billion in 2022.

Bank of America analyst Jessica Reif Ehrlich also believes that Netflix's growing free cash flow is the "catalyst" for the stock's rise and expects its free cash flow to rise to $8.9 billion in 2025 and $11.16 billion in 2026.

Data shows that as of last Friday, analysts have an overwhelming optimistic attitude towards Netflix, with 87% of analysts rating it as a buy, and only 3% of analysts advising to sell.