Tesla (TSLA) has work to do if it wants to remain among tech elites.
Despite a surprising third quarter earnings report that sent the EV maker’s stock surging — resulting in its biggest intraday jump in over a decade — Wall Street is once again reevaluating its inclusion in the Magnificent Seven.
The group’s members — Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla — dominated markets in 2023 and have returned as a potential key driver as third quarter earnings season gets underway. The group is expected to lead with 18.1% year-over-year earnings growth in Q3, and four of the stocks — Nvidia, Alphabet, Amazon, and Meta — are projected to be in the top 10 contributors to S&P 500 earnings growth, according to FactSet.
The debate over Tesla has returned as concerns linger despite its earnings resurgence. Tesla’s third quarter profits jumped 17%, a dramatic turnaround after two quarters of declines.
That’s not enough for Wall Street: Strategists tell me it’s still at risk of falling behind the rest of Big Tech due to overhyped fundamentals.
Freedom Capital Markets chief global strategist Jay Woods likened Tesla to bitcoin, suggesting the stock trades more on “hopes and dreams” than fundamentals.
“Tesla had its moment in the sun … to me, it’s more like a Cisco (CSCO) or an Intel (INTC) during the dot-com bubble, and now we’re moving on to other things,” Woods warned on Yahoo Finance’s Morning Brief.
While CEO Elon Musk has often categorized Tesla as a tech company, the firm’s AI and robotics bets will likely take years to pay off. In the meantime, Tesla must rely on improving its core auto business — a stark contrast to its Magnificent Seven peers.
“I’ve been in the tech sector since 1990, and I remember the Four Horsemen … We didn’t add an auto stock with Cisco, Intel, Dell (DELL), and Microsoft,” longtime tech investor Dan Morgan told me.
Tesla’s recent underperformance and high valuation further strain its standing among its Mag Seven peers. At nearly 73 times forward earnings per Yahoo Finance data, its forward price-to-earnings multiple far exceeds others in the group.
As of Friday afternoon, just over 40% of analysts covering Tesla rated the stock a Buy, according to Bloomberg data, making Tesla the least favored Magnificent Seven stock among analysts.
As far as Tesla’s replacement, Netflix has emerged as a strong contender.
Wealth Enhancement Group’s Ayako Yoshioka noted to me that Netflix “makes the most sense,” as shares of the original FAANG member recently hit an all-time high, buoyed by strong earnings and solid guidance.
Since the start of the year, the stock has surged 55%, behind only Nvidia and Meta in the Magnificent Seven.
Portfolio Wealth Advisors’ Jesus Alvarado-Martinez told me being a member of the Mag Seven is all about being a “cash flow machine,” and Netflix “fits the bill.”
“Netflix’s free cash flow has been relentless … Magnificent earnings, magnificent free cash flow, and magnificent subscribers numbers,” Alvarado added.
The streamer’s free cash flow has steadily climbed since the pandemic, growing to $2.19 billion in the third quarter, up from $1.89 billion a year earlier. For 2023, its free cash flow totaled $6.93 billion, compared to $1.62 billion in 2022.
Bank of America analyst Jessica Reif Ehrlich sees Netflix’s growing free cash flow as a “catalyst” for the stock and estimates free cash flow to rise to $8.9 billion in 2025 and $11.16 billion in 2026.
As of Friday, analysts are overwhelmingly bullish on Netflix. 87% of analysts covering the stock rate it a Buy, while only 3% recommend selling the stock.
While Tesla’s fate in the Magnificent Seven remains uncertain, Netflix’s recent surge reminds investors why it was once a favorite, further bolstering the case that now might be the right time to consider a switch-up in the dominant group.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
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