After climbing more than 30% year to date, the Nasdaq Composite is just 15% away from a new record high, the most conservative threshold for a new bull market. Investors looking to capitalize on that momentum may be drawn to what Wall Street has dubbed the "Magnificent Seven" stocks, a group of seven megacap companies that collectively account for more than 40% of the Nasdaq Composite by weighted exposure:
- Apple
- Microsoft
- Alphabet
- Amazon
- Nvidia
- Tesla
- Meta Platforms
Investors can think of the Magnificent Seven as a revised version of the FAANG stocks, and every member of the group is an incredible company in its own right. But that does not mean every stock listed is a worthwhile investment at the present time.
Here's one Magnificent Seven stock to buy and one to avoid ahead of the Nasdaq bull market.
The Magnificent Seven stock to buy: Tesla
Tesla (TSLA 0.49%) accounted for an industry-leading 21.8% of battery electric vehicle sales through the June quarter, up from 19% in the same period last year. That puts the company nearly seven percentage points ahead of its closest rival, Chinese manufacturer BYD. But Tesla accomplished something even more impressive last year when it recorded the highest operating margin among volume carmakers.
Elon Musk attributes that success to more sophisticated manufacturing technology, and the company plans to press its advantage with a new assembly process at Gigafactory Mexico, where production is slated to begin in 2025. The innovative assembly system could cut manufacturing costs in half and reduce its factory footprint by 40%, according to Reuters, enabling Tesla to build sub-$30,000 electric cars.
Manufacturing innovations will likely lead to modest margin expansion, but its full self-driving (FSD) platform promises a much greater impact on profitability. Musk believes FSD software and autonomous ride-hailing services could boost gross profit margin to 70% or more, up from about 25% today.
Looking ahead, the bull case for Tesla centers on two tremendous growth opportunities. The electric vehicle market is expected to increase at 23% annually to reach $1.7 trillion by 2032, while the autonomous vehicle market is projected to grow at 35% annually to hit $2.4 trillion during the same period.
Tech analyst Gene Munster is particularly bullish on Tesla, noting that FSD software could push operating income to $100 billion over the next decade, representing 23% annual growth. Munster also believes Tesla could be worth $2.5 trillion by 2026.
On that note, shares currently trade at an exorbitant 67.8 times earnings, but that multiple could fall quickly if operating income does indeed grow at 23% annually over the next decade, and shareholders could see market-beating returns at the same time. Better yet, should Tesla achieve a $2.5 trillion valuation by 2026, shareholders would see annual returns near 50% over the next three years. While that seems unlikely, risk-tolerant investors should still feel comfortable buying Tesla stock today, provided they start with a small position.
The Magnificent Seven stock to avoid: Apple
Apple (AAPL 0.06%) was recognized as the second-most valuable brand in the world in 2023 in a report published by consultancy Brand Finance. The company has now scored third place or better since 2011.
That uncommon brand authority has enabled Apple to carve out a strong presence in several consumer electronics verticals, the most notable of which are its positions as the second-largest smartphone manufacturer and the fourth-largest personal computer (PC) vendor worldwide.
Market share is great, but what truly differentiates Apple is its ability to pair hardware with adjacent software and services. The company monetizes its installed base of 2 billion active devices via the App Store, iCloud, and Apple Pay, as well as subscriptions like Apple TV+ and Apple Music. It enjoys a leadership position in two of those markets. The App Store earns twice as much revenue as Alphabet's Google Play Store, and Apple Pay is nearly three times more popular than the next closest in-store mobile wallet in the U.S.
Looking ahead, the global smartphone and PC markets are projected to grow at 7% and 9% annually, respectively, through 2030. Meanwhile, global mobile app sales are expected to rise at 14% annually, and U.S. mobile wallet revenue is forecasted to increase at 27% annually during the same period.
Apple has other opportunities as well -- its digital advertising business is growing quickly -- but the sum of those opportunities is this: Apple has a good shot at high-single digit revenue growth through 2030.
However, the company regularly repurchases stock, and its high-margin services business is growing as a percentage of total revenue, so it could achieve low-double-digit earnings growth through the end of the decade. But I don't think that justifies its current valuation of 30 times earnings, which itself is a premium to the five-year average of 25.3. That multiple will almost certainly contract in the future, and Apple will be hard pressed to deliver market-beating returns as that happens.
Apple is a wonderful company, but I think investors should avoid the stock for the time being.
