Tesla (TSLA 3.19%) has been a terrific long-term investment. Since the company went public in 2010, the shares have gained more than 10,000%. This meteoric rise helped place the company in the Magnificent Seven, a list of superstars that also includes the likes of Alphabet and Meta Platforms.
While most of the Magnificent Seven stocks have performed exceptionally well during the past three years, Tesla stock has actually lost nearly a third of its value. What went wrong with Tesla versus the rest of the Magnificent Seven? It's not that Tesla is a broken company, but that its business model depends on a different set of economics. Making cars is capital intensive, and over the long term, low margin. Tech companies like Alphabet and Meta, meanwhile, are asset light. These businesses generate high profit margins and can expand much more rapidly than the manufacturer of a physical product.
Right now, there's a company that doesn't get the attention it deserves even though it has a lot in common with the rest of the Magnificent Seven. Its market cap recently surpassed Tesla's, and I wouldn't be surprised to see it take Tesla's place in the Magnificent Seven as early as this year.
This is the next $1 trillion stock
The company is Visa (V +0.23%), one of the most overlooked stocks in recent memory. Since is went public in 2007, the shares have risen in value by nearly 1,900%. Its performance has matched or surpassed that of some Magnificent Seven stocks. During the same time period, for example, the shares of Alphabet have gained only 1,300%. That's still a terrific performance, but many investors may be surprised to learn that Visa has bested some of the most well-known growth stocks on the planet.
To be fair, Magnificent Seven stocks like Tesla have grown much more quickly than Visa during some short periods. From 2020 through 2022, for instance, Tesla's market cap zoomed from around $50 billion to roughly $1.2 trillion. During the same time period, Visa's market cap barely budged, hovering just above the $400 billion mark.
Of course, there's a catch to Tesla's heroic performance: It hasn't always been a smooth ride. Right now, Tesla's market cap is less than Visa's after giving up most of its gains in recent years. Visa's market cap, meanwhile, continues to steadily climb. As we'll see, that's because Visa shares a lot more in common with other Magnificent Seven stocks than Tesla. It's a commonality that could help the company become the next $1 trillion stock.
V Market Cap data by YCharts
One thing is not like the other
When comparing Visa and Tesla with the rest of the Magnificent Seven, both companies stand out, but in different ways. Looking at each company's operating margin -- a measure of how profitable a company is -- Tesla's capital-intensive business model stands out. It costs the company a lot of money to produce vehicles, and mounting competition in the electric vehicle market means there's a limit to how much it can charge.
While Tesla manages an operating margin of only 9.2% -- the worst metric of any Magnificent Seven stock -- Visa actually tops the list with an operating margin of 67.3%. It's no fluke, either. Since 2010, none of the Magnificent Seven stocks listed below were ever able to beat Visa on this profitability metric.
META Operating Margin (TTM) data by YCharts
Why does Visa have significantly higher operating margins than Tesla? It's because it runs with relatively little capital tied up in costly hard assets while it benefits from network effects.
Consider Alphabet, the parent company of Google, and Meta Platforms, the parent company of Facebook. Both companies essentially run a bunch of software, which is then used by billions of users. The more people engage with Google or Facebook, the more valuable that platform becomes. Google, for example, gains more data to further refine its search result algorithm. Facebook, meanwhile, can generate more data to better serve content to its user base. In this way, both companies grow stronger the bigger they get.
Tesla also grows stronger the bigger it gets, earning greater scale and reputation, but it costs a lot to maintain this growth. Whenever demand outstrips its manufacturing capacity, for instance, it must build a new factory at great cost. Google and Facebook, meanwhile, need to invest very little to scale their user bases. Visa operates with the same advantage.
More than 90% of Americans now own a debit or credit card. Roughly half of those cards run on Visa's payment network. There's good reason for this. Merchants don't want to accept a payment method used by a small group of shoppers. Shoppers, meanwhile, don't want to use a payment method accepted by only a small number of merchants. The natural result is industry concentration and high barriers to entry, limiting the competition. The more Visa grows, the more powerful it becomes. And because most of its business runs on software, profitability metrics are consistently high.
In many ways, Visa is a boring company. It isn't deeply involved in the latest trends like artificial intelligence, electric vehicles, or cryptocurrencies. Yet its business model is highly profitable, can grow for long stretches of time, and has durable competitive advantages. The same can't be said as confidently of Tesla. Put simply, don't be surprised to see Visa some day replace Tesla in the Magnificent Seven.
