June 13, 2024

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I Think This Stock Should Replace It in the “Magnificent Seven”

2 min read

Thanks to strong corporate results, as well as the ongoing artificial intelligence (AI) boom, the so-called “Magnificent Seven” stocks are soaring to new heights. All of these companies have seen their share prices rise in the last 12 months, except for one.

Tesla (NASDAQ: TSLA) shares are down over 2% during that time frame. That’s a sign that the market has grown pessimistic about the business and its prospects.

Instead of the electric vehicle stock, the Magnificent Seven should include Netflix (NASDAQ: NFLX), the world’s dominant direct-to-consumer streaming service. Its shares have soared 77% in the past year. Here’s my case.

Tesla is an expensive automaker

After years of outsize growth and improving profitability, Tesla has hit a roadblock. Higher interest rates and intense competitive pressures have pumped the brakes on revenue gains, with sales up just 3% in the fourth quarter of last year. And in 2023, Tesla’s gross margin was 18.2%, down from 25.6% in the previous year.

If you want to view things from a positive angle, Tesla’s valuation has come down due to the stock’s 17% decline in the trailing-three-year period. Shares trade at a forward price-to-earnings (P/E) ratio of about 61 today.

However, this is still a very expensive price to pay for a struggling enterprise. I think the valuation still prices in the assumption that Tesla will get back to posting the monster growth it did in prior years, with margin expansion a sure thing.

I also view the valuation as reflecting investor optimism about Tesla being categorized as a tech company and not an automaker. To its credit, the business is truly innovative and disruptive, and there’s still the possibility of introducing full self-driving functionality at some point in the future. But as things stand right now, it’s still a car manufacturer.

Press play on Netflix

While Tesla struggles, Netflix is thriving. The leading streaming entertainment provider added 13.1 million net new subscribers last quarter, bringing…

2024-02-26 10:00:00

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