Profit margin is only a fraction of its peers—how much longer can Tesla keep its "Magnificent Seven" tag?
Tesla has always been an outlier among the “Big Seven” US stocks, and its recent efforts to shift toward artificial intelligence have further accentuated its incongruence. Although this label is primarily based on stock price performance, the gap between Tesla and tech giants like Alphabet, Microsoft, and Nvidia is widening rapidly as its fundamentals deteriorate.
According to Bloomberg columnist Liam Denning’s analysis, the surge in Tesla’s valuation largely masks its weak fundamentals. Despite enjoying an extremely high forward price-to-earnings ratio, this is mostly due to declining earnings expectations rather than growth. Over the past three years, Tesla is the only “Big Seven” member to report an actual drop in earnings, and the expansion of its valuation multiples reflects a growing disconnect between its stock price and worsening fundamentals.
This divergence is especially evident in cash flow performance. As Tesla plans to more than double its capital expenditure to about $20 billion in 2026 to support its autonomous driving and robotics businesses, its 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 with massive expenditures, highlighting the vast gulf in financial strength.
Facing increased cash consumption, Tesla admitted to investors it may need “additional funds,” sparking market attention on CEO Elon Musk’s restructuring of his business empire. As Tesla’s standing within this elite group comes under growing scrutiny, Musk may need to seek new funding support through capital operations from other businesses such as SpaceX.
Overvalued and Divergent from Fundamentals
The concept of the “Big Seven” US stocks emerged in 2023, initially used to describe seven stocks leading the S&P 500 index. However, this label has largely become synonymous with large tech stocks, making Tesla’s inclusion rather abrupt. Tesla’s main business is essentially the manufacturing and sale of electric vehicles and battery packs, which falls under the scope of manufacturing. By comparison, while Apple sells consumer electronics and Amazon operates an e-commerce platform, both are recognized as highly profitable information technology giants.
Although Tesla has a technical advantage in electric vehicle design and driver assistance systems, its more tech-oriented businesses—such as Robotaxi (autonomous taxis), humanoid robots, and chip manufacturing plans—are mostly still in the research and development stage rather than mature commercial operations.
Tesla’s entry into the group is primarily due to its high valuation, which is also its biggest difference from other members. Bloomberg data indicates that Tesla’s high forward price-to-earnings ratio reflects investors’ dreams about its transformation, rather than actual performance. Two-thirds of the expansion in its valuation multiples over the past three years can be explained by declining earnings expectations. As the only member of the group with declining profits, Tesla’s fundamental support is increasingly weak.
Free Cash Flow Not on the Same Scale
Cash flow is a true indicator of business strength, and in this regard, Tesla is not even in the same league as the other six giants. Over the past five years, Tesla’s total free cash flow was about $27 billion. While Amazon’s free cash flow over the same period is only about 50% higher than Tesla’s, this is mainly because Amazon’s capital expenditure is nine times greater than Tesla’s.
A more intuitive comparison is: Except for Amazon, every member of the “Big Seven” generated more free cash flow in the past year alone than Tesla did in the past five years combined.
This gap may widen in the coming years. Tesla is trying to remake itself as a leader in autonomous driving and AI, with a capital expenditure budget of about $20 billion in 2026. This spend will cause its free cash flow to turn sharply negative. However, this budget is only one-ninth of Alphabet’s expected expenditure, and Alphabet is still expected to generate $34 billion in free cash flow in 2026 despite such a huge investment. This means other tech giants can fully cover their huge bets in AI with operating cash flow, while Tesla faces severe funding pressure.
Profit Margins Are Only a Fraction of Its Peers
The huge differences in cash flow reflect the fundamentally different business models. The other six companies can each be considered absolute leaders in their respective fields, possessing formidable moats. Tesla, although the world’s second-largest seller of electric vehicles, only accounts for 1.8% of total global car sales.
More critically, Tesla’s high ranking in the EV sector has not translated to high profits. According to Bloomberg’s analysis, Tesla’s operating profit margin is currently less than 5%. By comparison, the operating profit margins of the other six giants range from 11% (Amazon, at the low end of the range) to nearly 60% (Nvidia, at the high end). This shows that trying to build a tech giant from a car manufacturing base is an extremely challenging starting point.
In the competition for AI and chips, Tesla not only faces the huge budgets of its peers among the “Big Seven,” but must also contend with Alphabet’s Waymo, which recently raised $16 billion to expand its Robotaxi operations. In addition, OpenAI is reportedly seeking an IPO at a $1 trillion valuation, making the competitive environment extremely fierce.
Funding Pressure and Dependency on Financing
This financial backdrop provides a footnote for the restructuring of Musk’s business empire. Tesla has told investors it will burn cash this year and may need to raise funds. According to Bloomberg data, raising funds on the public equity market is deeply ingrained in Tesla’s DNA—it has done so 11 times historically, nearly equaling the total times of the other six giants combined.
Meanwhile, Musk’s xAI reportedly burns about $1 billion per month. Although SpaceX achieved $8 billion in EBITDA last year, this does not account for its substantial capital expenditure. Moreover, SpaceX recently took on xAI’s financing pressures. Despite Tesla having over $40 billion in cash on its books, ongoing cash consumption and the possibility of mergers involving three companies may unsettle seemingly calm investors.
Against this backdrop, if SpaceX can successfully IPO and raise tens of billions of new capital, it would be crucial to the entire Musk business landscape. Given Tesla’s precarious standing as the “seventh giant,” Musk may urgently need to create an eighth giant to support his ambitions.
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