With profit margins only a fraction of its peers, how long can Tesla hold onto its label as one of the "Seven Giants" of U.S. stocks?

Tesla has always been an outlier among the "Seven Giants" of the U.S. stock market, and its recent attempts to transition towards artificial intelligence have further exacerbated this incongruity. Although this label is primarily based on stock price performance, the gap between Tesla and tech giants like Alphabet, Microsoft, and Nvidia is rapidly widening as fundamental data deteriorates.

According to Bloomberg columnist Liam Denning, the surge in Tesla's valuation has largely masked its weak fundamentals. Despite the stock enjoying a very high forward price-to-earnings ratio, this is largely due to declining earnings expectations rather than growth drivers. Over the past three years, Tesla has been the only company among the "Seven Giants" to report an actual decline in earnings, and this expansion of valuation multiples reflects an increasingly severe disconnect between the stock price and the deteriorating fundamentals.

This divergence is particularly evident in cash flow performance. As Tesla plans to more than double its capital expenditures to about $20 billion by 2026 to support its autonomous driving and robotics businesses, the company's free cash flow is expected to turn negative for the first time since 2018. In contrast, peers like Alphabet are expected to generate tens of billions of dollars in free cash flow in the same year, even amid massive expenditures, highlighting the significant financial gap between the two.

Faced with increasing cash consumption, Tesla has candidly informed investors that it may need "additional funding." This has also sparked market interest in the restructuring of CEO Musk's business empire. As Tesla's position within this elite group comes under increasing scrutiny, Musk may need to seek new funding support through capital operations in other businesses under his umbrella, such as SpaceX.

Overvaluation and Diverging Fundamentals

The concept of the "Seven Giants" in the U.S. stock market emerged in 2023, initially used to describe the seven stocks leading the S&P 500 index. However, this label has largely become synonymous with large tech stocks, making Tesla's inclusion seem rather abrupt. Tesla's main business essentially revolves around the manufacturing and sales of electric vehicles and battery packs, which falls under the manufacturing sector. In contrast, while Apple sells consumer electronics and Amazon has an e-commerce platform, both are recognized as highly profitable information technology giants.

Although Tesla has technological advantages in electric vehicle design and driver assistance systems, its more tech-oriented businesses—such as Robotaxi (autonomous ride-hailing), humanoid robots, and chip manufacturing plans—are currently more in the research and development stage rather than mature commercial operations.

Tesla's inclusion in this group is primarily due to its high valuation, but this is precisely what sets it apart from other members. According to Bloomberg data, Tesla's high forward price-to-earnings ratio reflects investors' dreams of its transformation rather than actual performance. Over the past three years, two-thirds of the expansion in its valuation multiples can be explained by declining earnings expectations. As the only member in the group with declining profits, Tesla's fundamental support appears increasingly weak.

Free Cash Flow Not on the Same Level

Cash flow is a true indicator of a company's strength, and in this regard, Tesla is on a completely different level compared to the other six giants. Over the past five years, Tesla's free cash flow has totaled approximately $27 billion. While Amazon's free cash flow during the same period is only about 50% higher than Tesla's, this is mainly due to Amazon's capital expenditures being nine times that of Tesla.

A more intuitive comparison is: excluding Amazon, each member of the "seven giants" has generated free cash flow in just the past year that far exceeds Tesla's total over the past five years.

This gap may further widen in the coming years. Tesla is attempting to reshape itself as a leader in autonomous driving and artificial intelligence, with a capital expenditure budget of approximately $20 billion for 2026. This expenditure will lead to a significant negative free cash flow. However, this budget is only one-ninth of what Alphabet is expected to spend, and Alphabet is still projected to generate $34 billion in free cash flow in 2026 despite such a massive investment. This means that other tech giants can fully cover their substantial bets in AI with operating cash flow, while Tesla faces severe funding pressure.

Profit margins are just a fraction of peers

The huge difference in cash flow reflects the underlying differences in business models. The other six companies can all be seen as absolute leaders in their respective fields, possessing extremely high moats. Although Tesla is the second-largest electric vehicle seller in the world, its share of total global car sales is only 1.8%.

More critically, Tesla's high ranking in the electric vehicle sector has not translated into high profits. According to Bloomberg Opinion analysis, Tesla's operating profit margin is currently less than 5%. In comparison, the operating profit margins of the other six giants range from 11% (Amazon, at the lower end of the range) to nearly 60% (NVIDIA, at the upper end of the range). This indicates that attempting to build a tech giant based on an automotive manufacturing company is exceptionally challenging.

In the competition within the fields of artificial intelligence and chips, Tesla not only faces the massive budgets of other members of the "seven giants," but also the competition from Waymo, a subsidiary of Alphabet, which has just raised $16 billion to expand its Robotaxi operations. Additionally, OpenAI is reportedly seeking an IPO with a valuation of $1 trillion, making the competitive environment extremely fierce.

Funding pressure and reliance on financing

This financial backdrop provides a footnote to the restructuring of Musk's business empire. Tesla has informed investors that it will consume cash this year and may need to raise funds. According to data compiled by Bloomberg, financing through the public stock market has been deeply ingrained in Tesla's DNA, having conducted 11 such financings in its history, a number that is almost equivalent to the total number of financings conducted by the other six giants combined.

Meanwhile, Musk's xAI is reportedly burning about $1 billion a month. Although SpaceX achieved $8 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) last year, this does not account for its massive capital expenditures. Furthermore, SpaceX has recently taken on the financing pressure of xAI. Despite Tesla having over $40 billion in cash on its balance sheet, the ongoing cash consumption and potential rumors of mergers involving the three companies may cause seemingly calm investors to feel uneasy In this context, if SpaceX can successfully conduct an IPO and raise tens of billions of dollars in new funding, it will be crucial for the entire Musk business empire. Given that Tesla's status as the "seventh giant" is precarious, Musk may urgently need to create an eighth giant to support his ambitions