Wall Street professionals and everyday investors are constantly on the lookout for companies, or groups of companies, that consistently outperform the broader market. For much of the past decade, this preeminent group of outperformers was the "FAANG stocks."
But with innovation comes new companies ready to carry the torch. In 2023, the upward momentum on Wall Street has been all about the "magnificent seven."
The magnificent seven stocks are (in order from largest market cap to smallest):
- Apple (AAPL -1.62%)
- Microsoft (MSFT -1.30%)
- Alphabet (GOOGL -1.76%) (GOOG -1.84%)
- Amazon (AMZN -2.33%)
- Nvidia (NVDA -0.36%)
- Meta Platforms (META -2.95%)
- Tesla (TSLA 0.23%)
Image source: Getty Images.
These seven companies have run circles around the benchmark S&P 500 and, more importantly, offer a laundry list of competitive advantages. In the same order as listed above:
- Apple is the United States' leading smartphone provider, and the roughly $600 billion in shares the company has repurchased since the start of 2013 is unrivaled by any other public company.
- Microsoft is perfectly blending the old with the new. Its Windows operating system still dominates desktops, while Azure has become the world's No. 2 cloud infrastructure service provider.
- Alphabet's internet search engine Google is a practical monopoly, with 92% of global internet search share, as of July 2023.
- Amazon accounts for about 40% of all U.S. online retail sales, and cloud infrastructure service segment Amazon Web Services is No. 1 in the world in market share.
- Nvidia is riding the artificial intelligence (AI) wave and is expected to garner a 90% share of the graphics processing units deployed in AI-accelerated data centers.
- Meta Platforms' social media assets attracted more than half of the world's adult population to its family of apps each month during the second quarter.
- Tesla is the only pure-play electric-vehicle (EV) manufacturer that's recurrently profitable, and it's the clear-cut leader in market share in North America.
Nevertheless, the magnificent seven aren't cut from the same cloth. Whereas one magnificent seven stock stands out as a plain-as-day bargain in September, another should have investors slamming on the brakes.
The magnificent seven stock that's a screaming buy in September: Meta Platforms
Among Wall Street's seven outperformers in 2023, it's social media company Meta Platforms that stands head and shoulders above its peers as the best value in September.
As always, even the best stocks have headwinds that can send them lower. For Meta, it's the health of the U.S. economy and its aggressive spending on augmented/virtual reality and the metaverse via Reality Labs.
In terms of the former, Meta Platforms generated more than 98% of its $60.6 billion in revenue through the first six months of 2023 from advertising. Ad spending tends to be highly cyclical. With a number of economic indicators and predictive tools suggesting the U.S. economy could shift into reverse in the coming quarters, this would bode poorly, at least in the short run, for Meta's advertising operations.
Meanwhile, CEO Mark Zuckerberg's aggressive investments in the metaverse are really adding up in the loss column. Reality Labs' six-month loss ballooned to $7.73 billion in 2023, up from $5.77 billion in the prior-year period. If U.S. economic growth slows, investors may be less tolerant of Zuckerberg's willingness to spend.
While these are both tangible obstacles for Meta, neither are particularly worrisome. For instance, even though advertising is cyclical, the U.S. economy spends a disproportionate amount of time expanding. More often than not, Meta's social media platforms are going to have substantial ad-pricing power in their corner.
As I pointed out earlier, it also doesn't hurt that Facebook, Instagram, WhatsApp, and Facebook Messenger are, collectively, attracting more than half of the world's adults on a monthly basis. Meta's family of apps logged 3.88 billion monthly active users in the second quarter, making the company the clear go-to for advertisers.
Additionally, Meta Platforms' cash on hand and cash flow from operations can support aggressive investments in augmented/virtual reality and the metaverse. The company closed out June with more than $53 billion in cash, cash equivalents, and marketable securities, and generated $31.3 billion in net cash from operating activities through the first six months of 2023. Put simply, Meta has the luxury of taking chances few other social media platforms can. If Zuckerberg's vision for the future is correct, his company will be one of the primary on-ramps to the metaverse.
Best of all, Meta Platforms is an amazing value. Despite tripling from its 2022 bear market lows, Meta shares can be purchased right now for around 10X Wall Street's cash flow estimate for 2024. That's well below the 16X multiple to cash flow Meta has averaged at years' end over the past five years.
A Tesla Model S charging. Image source: Tesla.
The magnificent seven stock that's worth avoiding in September: Tesla
However, not every magnificent seven stock is set to continue shining. Among the seven that have outperformed in 2023, the one to avoid in September is none other than EV manufacturer Tesla.
I certainly won't sit here and pretend that Tesla hasn't made history or proved naysayers wrong at nearly every turn. It's the first automaker to successfully build itself from the ground up to mass production in over a half-century.
As noted, it's also the only pure-play EV maker that's profitable on a recurring basis, according to generally accepted accounting principles (GAAP). This year could mark its fourth consecutive year of GAAP profits. Tesla has consistently utilized its first-mover advantages in the EV space to grab share in North America and internationally.
Furthermore, Tesla has ancillary operations that may help with the heavy lifting. Its supercharger network has become a favorite among automakers, and the company's energy storage solutions appear to offer long-term promise.
But that's where the praise for Tesla should end. While it's burned rubber up until now, all indications are that its shares are headed for a breakdown.
Perhaps the most glaring flaw with Tesla is the price war the company kicked off earlier this year. The company's production line has faced at least a half-dozen price cuts. In response to an investor question during the company's first-quarter conference call, CEO Elon Musk summarized that Tesla's pricing strategy is based on demand for its EVs. If the company continues to slash prices, it's likely because inventory levels are rising and/or demand isn't as robust as expected. Since the end of the third quarter, Tesla's operating margin has plummeted from 17.2% to 9.6%.
This probably goes without saying, but competition is picking up in the EV space and Tesla is almost certain to struggle to hold onto its share. BYD has been running circles around Tesla in China, and North American stalwarts like General Motors and Ford Motor Company have the branding power and history that Tesla lacks.
Elon Musk himself is another reason for investors to be leery of Tesla. Though Musk is synonymous with the company's innovation and success, he also seems to be a magnet for securities regulators and is constantly distracted by a multitude of side projects (SpaceX, Boring Company, and X, the platform formerly known as Twitter).
Worse yet, Musk has a growing list of innovations and promises that haven't come to fruition. We're effectively in the 10th year of his claim that full autonomy is "one year away." These promises and innovations are baked into Tesla's valuation, and could very easily be backed out, too.
Finally, Tesla hasn't demonstrated that it's anything more than an auto stock. Its supercharger network and energy storage operations are generally low margin, and its solar segment has been a money-loser since day one. Auto companies are highly cyclical and trade at single-digit price-to-earnings (P/E) ratios for a reason. Tesla is trading at a P/E of 71 times forecast earnings in 2023. Something has to give, and my best guess is it's Tesla's bloated valuation.
