Thanks to its outstanding gain of 943% in the last decade, coupled with its disruptive culture and category-leading products, Tesla (TSLA 0.16%) is part of the "Magnificent Seven." It's in this exclusive club with Amazon, Alphabet, Apple, Microsoft, Meta Platforms, and Nvidia, all huge winners in the stock market.
But there's another stock up a remarkable 1,040% in the past 10 years, and I'd argue it should replace Tesla in the Magnificent Seven.
NASDAQ: TSLA
Key Data Points
Tesla's struggles
Tesla just reported its first-quarter financial results. Overall revenue came in at $21.3 billion, with adjusted earnings per share totaling $0.45. These two headline figures missed Wall Street's expectations. Adding fuel to the fire, management said "vehicle volume growth rate [in 2024] may be notably lower than the growth rate achieved in 2023" in the earnings presentation.
Macro headwinds, particularly higher interest rates, have dampened demand for electric vehicles (EVs). Moreover, competition in the industry is intensifying. These challenges have forced Tesla to engage in ongoing price wars to bolster volumes.
That couldn't stop sales from falling, and it continues to result in pressured profitability. Tesla's Q1 gross margin was 17.4%, marking the sixth straight quarter this metric has contracted.
Weak revenue and profitability trends aren't what shareholders want to see, especially if they view Tesla as a tech business rather than an automaker. But the recent financials point to how this is indeed still a car company.
Despite a 60% decline from its previous peak, Tesla stock remains expensive. Shares of the EV stock trade at a steep forward price-to-earnings (P/E) ratio of 57. This still reflects some lofty expectations about the business and its long-term potential.
NASDAQ: NFLX
Key Data Points
Netflix's success
Though the FAANG stock grouping has given way to the Magnificent Seven, there are strong arguments to be made that FAANG member Netflix (NFLX 0.02%) should find its way into the "Magnificent Seven" instead of Tesla. This business is firing on all cylinders right now. In the first quarter, Netflix added 9.3 million net new subscribers, bringing its total to a whopping 269.6 million. Revenue was also up 14.8% year over year.
Both of these key numbers have climbed rapidly in the past several years. The latest surge can be partly attributed to the introduction of an ad-supported tier, which provides a new, cheaper option for customers while at the same time giving Netflix the ability to build a high-margin advertising segment.
Netflix possesses similar characteristics to the companies in the "Magnificent Seven." For starters, it spearheaded an industry -- streaming entertainment -- to become the clear leader in that market. Founders of those other tech giants are viewed as visionaries. Netflix's Reed Hastings undoubtedly belongs in the same category.
This company has also been lifted by a powerful long-term tailwind: cord-cutting. There's still a sizable growth runway for streaming to capture. All the other "Magnificent Seven" constituents have tailwinds working in their favor as well, such as digital advertising, digital payments, artificial intelligence, and cloud computing.
Netflix also benefits from an economic moat that protects it from the threat of competition. No other pure-play streaming service has the scale this company does. Netflix is able to spread its fixed content costs, expected to be about $17 billion this year, over a huge user base. This has resulted in tremendous margin expansion over time -- and more recently, the generation of billions of dollars of free cash flow.
Investors can scoop up the stock at a forward P/E ratio of 31, putting it in the middle of the pack among the Magnificent Seven. That's a reasonable valuation to pay for a top company like Netflix.
