Despite rising interest in artificial intelligence (AI), ‘Magnificent Seven’ stocks are here to stay Tesla (NASDAQ: TSLA) And Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) underperformed S&P500 over the past year by a wide margin. Specifically, Tesla shares fell 9% and Alphabet shares rose 18%, while the S&P 500 rose 36%.
Looking ahead, Wall Street expects Tesla to decline in the coming year, but analysts believe Alphabet will post significant gains. Here are the details of it The Wall Street Journal:
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Of the 58 analysts covering Tesla, the average twelve-month price target is $216 per share. This forecast implies a 2% decline from the current share price of $221.
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Of the 68 analysts covering Alphabet, the average twelve-month price target is $203 per share. This forecast implies a 24% upside from the current share price of $163.
Investors should never rely on price targets, but they are a good place to start researching a company. Here are the important details about Tesla and Alphabet.
Tesla: 2% implicit disadvantage
Tesla has stumbled due to macroeconomic challenges. High interest rates have increased inflationary pressure on consumers’ pockets, suppressing demand for electric cars. Tesla has cut prices several times to stimulate demand, but its leading market share has fallen 3.1 percentage points through August this year, and the price cuts have weighed heavily on its financial results.
Tesla narrowly exceeded consensus expectations in the second quarter, but profits lagged behind for the fourth time in a row. Specifically, while revenue rose 2% to $25.5 billion, operating expenses rose 39% and non-GAAP (generally accepted accounting principles) net income fell 43% to $0.52 per diluted share. However, there were some positives, including increased production of the 4680 battery cell, something management called a “major cost savings milestone.”
Tesla recently hosted a robotaxi event where it unveiled the Cybercab. The self-driving vehicle without a steering wheel and pedals will go into production in 2027 and cost less than $30,000. CEO Elon Musk also said Tesla would launch an unattended version of its full self-driving (FSD) software in California and Texas next year. But investors are right to be skeptical, as the company has made too many promises in the past.
Looking ahead, Wall Street expects Tesla’s revenues to grow 12% annually over the next three years. That estimate makes the current valuation of 62 times earnings seem very expensive. However, Tesla could exceed the consensus forecast if its FSD software can truly function unattended by 2025. That could boost sales of FSD subscriptions and enable a rapid launch of robotaxi services.
Personally, I think enthusiastic investors can buy a small position in the stock here, provided they know that long-term performance depends heavily on Tesla’s ability to transition into high-margin artificial intelligence revenue (i.e. FSD software and robotaxi services) and away from capital-intensive car production. That said, it may be wiser to wait for additional details on the unattended FSD and the Cybercab.
Alphabetical: 24% implied upward trend
According to eMarketer, Alphabet is the global leader in digital advertising, with an estimated market share of 27.4% by 2024. That dominance comes from its ability to collect data and engage consumers on popular Internet platforms such as Google Search and YouTube. Alphabet has long used AI to inform its search engine and advertising technology software, but recently added generative AI capabilities to further improve the user experience.
Alphabet also operates the third largest public cloud in Google Cloud Platform. While its market share is smaller than that of Amazon Web services and Microsoft Azure has helped the company gain a percentage point of market share over the past year by a large margin, the power of its AI infrastructure and large language models. “Google’s Gemini combines a world-class model with enterprise cloud services,” Google analysts said Forrester research.
Alphabet reported solid financial results in the second quarter, exceeding expectations on both the top and bottom lines. Revenue rose 14% to $84.7 billion thanks to strong momentum in the cloud computing unit and more modest growth in the advertising segment. Meanwhile, GAAP net income rose 31% to $1.89 per diluted share due to continued cost control efforts.
In addition to advertising and cloud computing, Alphabet also has long-term opportunities with Waymo, an autonomous driving subsidiary. The company provides more than 100,000 rides each week throughout Phoenix, San Francisco and Los Angeles. It has partnered with Uber to bring autonomous ride-hailing services to Atlanta and Austin by 2025.
Analysts at Bank of America estimates that Waymo’s sales could reach $75 million this year, an insignificant amount compared to Alphabet’s total sales, but the autonomous drive unit should become increasingly important in the future. According to Straits Research, the robotaxi market is expected to grow 67% annually to reach $108 billion by 2031.
Looking ahead, Wall Street expects Alphabet’s profits to rise 17% annually over the next three years. That consensus estimate makes the current valuation of 23.4 times earnings seem reasonable. These figures give a price-earnings-growth ratio (PEG ratio) of 1.4, which corresponds to the three-year average. Long-term investors should feel comfortable buying a small position in this stock today.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Bank of America, Microsoft, Tesla and Uber Technologies. 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. Alphabet Stock: Wall Street Says Buy One and Sell the Other was originally published by The Motley Fool
