The S&P500 (SNPINDEX: ^GSPC) is up 19% this year, and shares of the Magnificent Seven are responsible for almost half of these gains. But most of the credit goes to Nvidiaand to a lesser extent Metaplatforms. The other five members of the illustrious group have underperformed Tesla (NASDAQ: TSLA) And Microsoft (NASDAQ: MSFT).
Shares of Tesla are down 3% year to date, while shares of Microsoft are up just 9%. But Wall Street expects stocks to move in the opposite direction over the next year.
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Of the 58 analysts who follow Microsoft, the average price target is $497.50 per share. This forecast implies a 22% upside from the current share price of $409.
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Of the 59 analysts who follow Tesla, the average price target is $225 per share. This forecast implies a 7% decline from the current share price of $241.
These numbers imply that investors should buy Microsoft and sell Tesla. Here’s what investors need to know about these Magnificent Seven stocks.
1.Microsoft
Microsoft is the largest software company and the second largest public cloud in the world. The company’s strength in software comes mainly from its office productivity (Microsoft 365), enterprise resource planning (Dynamics 365) and business intelligence (Power BI) products, three markets where the company has a leading position.
Microsoft is well positioned to gain market share in these software categories with the help of new generative artificial intelligence (AI) assistants, which automate workflows such as composing text and organizing data. The number of customers using Microsoft 365 Copilot increased more than 60% sequentially in the June quarter.
Microsoft Azure traces Amazon Web services in the areas of cloud infrastructure and platform services, but thanks to the power of machine learning and artificial intelligence, Azure has gained a percentage point of market share in the past year. According to CEO Satya Nadella, the number of Azure AI customers increased by almost 60% during that period.
Microsoft reported financial results for the fourth quarter of fiscal 2024 (ended June 30) that beat estimates on both the top and bottom lines. Revenue rose 15% to $64.7 billion and GAAP earnings rose 10% to $2.95 per diluted share. However, the acquisition of video game publisher Activision represented a 3 percentage point headwind to revenue growth, but a 2 percentage point headwind to profit growth.
Going forward, Microsoft is one of the companies best positioned to monetize generative AI due to its strength in enterprise software and cloud computing. Wall Street predicts the company’s profits will grow 13% annually over the next three years. But that consensus estimate makes the current valuation of 35 times earnings seem a bit pricey.
These figures give a PEG ratio of 2.7, a slight premium over the three-year average of 2.4. I think investors should keep Microsoft on their watchlist for now, but plan to buy a few shares when and if the price drops by about 10%. Alternatively, investors eager to own this stock could buy a very small position today.
2.Tesla
Tesla has faced macroeconomic headwinds in recent quarters. Inflation and high interest rates have suppressed consumer spending, so the company has cut prices several times to stimulate demand. Tesla led the industry with a 17.6% market share in electric car sales through July. But market share fell by 3.3 percentage points compared to the same period last year.
Moderate demand and lower prices led to disappointing financial results in the second quarter. Revenue rose 2% to $25.5 billion, operating margin fell 3.3 percentage points and non-GAAP net income fell 43% to $0.52 per diluted share. Tesla has now missed Wall Street’s earnings estimates over the past four quarters, which partly explains why it was the worst-performing Magnificent Seven stock this year.
However, Tesla believes that autonomous driving technology is the next wave of growth. It already sells full software subscriptions for self-driving cars (FSD) to consumers, and CEO Elon Musk recently said that a few major automakers are looking to license FSD. In addition, FSD will also support robotaxi services. “We believe the Tesla software experience is best-in-class across all of our products and plan to seamlessly integrate ride-hailing into the Tesla app,” the company wrote in a recent slide deck.
Last year, Musk told CNBC that FSD software could push Tesla’s gross margin to 70%, nearly quadrupling what it was last quarter. Importantly, Tesla may be one of the companies best positioned to make money from autonomous driving technology because of its data advantage. It has about 1.6 billion miles of FSD data, far more than other automakers, and plenty of quality data is essential for training the deep learning models that power FSD software with decision-making capabilities.
Wall Street expects Tesla’s profits to rise 12% annually over the next three years, making its current valuation of 68 times earnings look outrageously expensive. That said, earnings expectations are likely to rise significantly if and when Tesla starts offering robotaxi services on a large scale.
Here’s my take: Investors who have doubts about the company’s autonomous driving ambitions should avoid the stock, and shareholders in that group should consider selling their positions. Alternatively, shareholders confident in Tesla’s vision for FSD and robotaxi services should continue to patiently hold the stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon, Nvidia and Tesla. The Motley Fool holds positions in and recommends Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Tesla Stock vs. Microsoft Stock: Wall Street Says Buy One and Sell the Other was originally published by The Motley Fool
