The "Magnificent Seven" is a group of seven of the world's largest technology stocks. Last year, they delivered an average return of 112%, which crushed the 24% gain in the benchmark S&P 500 index. The seven stocks include:
- Nvidia
- Meta Platforms
- Apple
- Microsoft
- Alphabet (Google)
- Amazon
- Tesla (TSLA -2.05%)
However, the Magnificent Seven has splintered in the early stages of 2024, with Apple and Tesla trading in the red despite the 10% gain in the S&P 500. Tesla's whopping 31% year-to-date loss has prompted some Wall Street analysts to call for its removal from the Magnificent Seven.
NASDAQ: TSLA
Key Data Points
Tesla's core business is struggling
Tesla is working on several artificial intelligence (AI)-powered innovations like fully autonomous self-driving software and humanoid robots, but 85% of its revenue still comes from selling electric vehicles (EVs). The company sold a record-high 1.8 million cars last year, but it represented growth of 38% compared to its 2022 result, which was far below CEO Elon Musk's 50% target.
Growth will likely decelerate further in 2024. Tesla neglected to offer a forecast for vehicle deliveries, leaving some analysts to speculate the number could come in at around 2.2 million. That would represent an increase of 22%, and it's worth noting Musk also omitted his usual 50% average annual growth target in Tesla's most recent financial report.
Tesla slashed the price of its vehicles by an average of 25.1% throughout 2023 to spur demand in the wake of tough economic conditions, which sent its earnings per share (profit) sinking 23% to $3.12. That places its stock at a price-to-earnings (P/E) ratio of 54.7, which is still significantly more expensive than the 31.1 P/E of the tech-heavy Nasdaq-100 index.
Therefore, there is a clear case for further downside in Tesla stock in the short term. The long term might be a different story, depending on the success of the company's other initiatives beyond EV sales.
Image source: Tesla.
The stock that should replace Tesla in the Magnificent Seven
The current Magnificent Seven companies have one thing in common: They are developing AI technologies. If Tesla were removed from the group, I think Oracle (ORCL -0.42%) would be a stellar replacement.
Oracle has emerged as a powerhouse in cloud computing, and it's building some of the best data center infrastructure for AI developers using Nvidia's industry-leading graphics processing units (GPUs). Chairman Larry Ellison says Oracle's GPU cluster technology inside its new Gen2 Cloud infrastructure allows businesses to train AI twice as fast and at half the cost of competing clouds.
As a result, Gen2 Cloud has already attracted billions of dollars in commitments from some of the AI industry's leading start-ups, from Cohere to Elon Musk's xAI, but Ellison says Oracle simply can't keep up with demand. The company has 40 AI bookings worth at least $1 billion each that haven't come online because they are waiting for additional infrastructure to be built.
During the fiscal 2024 second quarter (ended Nov. 30, 2023), Oracle said it had 66 active data center regions around the world. It's currently upgrading all of them to suit AI, and it's in the process of building 100 more, which is a substantial increase in the company's footprint.
NYSE: ORCL
Key Data Points
Oracle Cloud Infrastructure revenue is soaring
Oracle reports Gen2 Cloud revenue under its Oracle Cloud Infrastructure (OCI) segment. OCI revenue soared 49% year over year to $1.8 billion during Q3, making it the company's fastest growing component. It still only accounted for 13.5% of Oracle's total revenue, but Ellison thinks OCI will grow by 50% for several years to come so it won't be long before it's a significant contributor.
Oracle's data center technology is also unique in that it's completely automated. That means there is very little cost difference between operating 10 locations and 100 locations, so it scales incredibly well and delivers strong profitability.
On that note, despite Oracle's total revenue growing by just 7% to $13.3 billion in Q3, the company's earnings per share jumped 25% to $0.85. Careful cost management was a contributor to the strong result, but there was also a significant increase in gross profit margin on the infrastructure side. The latter will continue to improve as more data centers come online.
Oracle stock is far cheaper than Tesla
Oracle stock is up 22.8% this year, which is more than twice the gain of the S&P 500 index, and it's sitting near an all-time high. The company will wrap up its fiscal 2024 full year on May 31, and Wall Street predicts its earnings per share will land at around $5.59.
That will place Oracle stock at a P/E ratio of 22.8, which is less than half the P/E ratio of Tesla. It's also a 27% discount to the Nasdaq-100 index, implying Oracle is much cheaper than most of its peers in big tech.
But it gets better. Oracle's bookings (which are expected to eventually convert to revenue) hit a record high of $80 billion during Q3, which was a 29% year-over-year increase. Bookings clearly grew substantially faster than the company's revenue during the quarter, which implies its top line could accelerate in the near future.
Given Oracle's relatively cheap valuation, its rapid growth in OCI, and its large bookings backlog, the company's stock might be poised for several years of steady upside. In fact, Oracle is worth $351 billion as of this writing and I think it could reach a $1 trillion valuation within the next decade.
