When examined over extended periods, Wall Street is a wealth-building machine. But over shorter timelines, the stock market is far less predictable. Since this decade began, all three major indexes have vacillated between bear and bull markets.
When volatility and uncertainty creep into the picture, investors have a tendency to flock to time-tested industry leaders. In 2023, that's been the "Magnificent Seven."
Image source: Getty Images.
When I say, Magnificent Seven, I'm referring to:
- Apple (AAPL -0.60%)
- Microsoft (MSFT 1.44%)
- Alphabet (GOOGL 0.66%) (GOOG 0.56%)
- Amazon (AMZN 2.29%)
- Nvidia (NVDA -3.89%)
- Tesla (TSLA -1.80%)
- Meta Platforms (META 2.10%)
These seven juggernauts are responsible for almost the entirety of the S&P 500's 12.2% year-to-date gains, as of Oct. 6, with the remaining 493 companies collectively just above the breakeven line.
In addition to their outperformance, the Magnificent Seven bring clear-cut competitive advantages or sustained moats to the table for their shareholders:
- Apple holds a majority share of smartphone sales in the U.S. and has repurchased in the neighborhood of $600 billion worth of its common stock since the start of 2013.
- Microsoft's legacy operating system, Windows, still dominates globally, while Azure ranks second globally in cloud infrastructure service share.
- Alphabet's Google accounts for nearly 92% of worldwide internet search share, while Google Cloud ranks behind Azure as the global No. 3 in cloud infrastructure service share.
- Amazon's online marketplace is responsible for roughly $0.40 of every $1 in online retail sales in the United States. Meanwhile, Amazon Web Services sits ahead of Azure and Google Cloud in cloud infrastructure service market share.
- Nvidia controls the lion's share of artificial intelligence (AI)-driven graphics processing units being used in high-compute data centers.
- Tesla is North America's leading electric-vehicle (EV) manufacturer and the only pure-play EV maker that's achieved recurring profitability on the basis of generally accepted accounting principles (GAAP).
- Meta Platforms owns many of the top social media platforms in the world and attracted nearly 3.9 billion monthly active users in the June-ended quarter.
But while the Magnificent Seven have dominated their respective industries to this point, their outlooks meaningfully differ. As we move forward into October, one Magnificent Seven stock stands out for its exceptionally inexpensive valuation, while another appears priced for perfection.
The Magnificent Seven stock to buy hand over fist in October: Meta Platforms
Among these historically dominant stocks, it's social media giant Meta Platforms that stands head and shoulders above its peers as the Magnificent Seven component to buy hand over fist in October.
As with every publicly traded company, Meta Platforms isn't immune to potential headwinds. The biggest threat shareholders should be aware of is the health of the U.S. economy. Although job creation remains strong and the unemployment rate sits below 4%, a host of economic datapoints and predictive indicators suggest a U.S. recession is likely in the not-too-distant future.
Recessions are typically bad news for most sectors and industries. However, economic downturns can be particularly rough on ad-driven businesses. Advertisers are quick to pare back their spending at the first signs of potential trouble. Through the first six months of 2023, 98.3% of Meta's $60.6 billion in revenue came from advertising.
However, this is one side of a disproportionate coin. While recessions are both a normal and inevitable part of the economic cycle, they're not known for lasting long. Of the 12 recessions that have occurred following World War II, just three have lasted at least 12 months, and none have surpassed 18 months. By comparison, most economic expansions last for years, if not a full decade. It means the advertising industry is thriving far more than it's on the defensive.
To add to this, Meta Platforms has some of the most-desirable social media assets on the planet. Facebook, WhatsApp, Instagram, and Facebook Messenger are consistently among the most-downloaded social apps worldwide. Meta also launched Threads in early July as a direct competitor to X, the platform formerly known as Twitter. It took Threads just five days to surpass 100 million users.
With 3.88 billion monthly active users across its family of apps, as of June 30, advertisers are well aware that Meta gives them the best chance to reach a broad and/or targeted audience. In other words, Meta often possesses substantial ad-pricing power over merchants.
Additionally, CEO Mark Zuckerberg is positioning Meta for longer-term success by diversifying its revenue stream. Aggressive spending on augmented/virtual reality devices and metaverse innovations via the company's Reality Labs segment is costing billions of dollars each quarter. But if Zuckerberg's vision for the future is correct, Meta will secure its place as a core on-ramp to the metaverse.
Furthermore, Meta is one of the few companies with the luxury to take chances thanks to its cash-rich balance sheet and highly profitable operating model. Even with Reality Labs pacing a greater than $15 billion operating loss in 2023, Meta is on track to generate close to $49 billion in income from its family of apps this year, and the company is sitting on more than $53 billion in cash, cash equivalents, and marketable securities.
Lastly, Meta's valuation is still highly attractive. Despite more than tripling from its 2022 bear market low set less than a year ago, shares can be purchased for about 11 times estimated cash flow for 2024. That's well below the multiple of nearly 16 times cash flow Meta has traded at (as of year-end) over the past five years.
Tesla's flagship Model 3 has endured multiple price cuts since the year began. Image source: Tesla.
The Magnificent Seven stock to avoid in October: Tesla
Although the Magnificent Seven have held true to their name through the first nine months and change of 2023, the future for at least one component looks anything but magnificent. In October, the one Magnificent Seven stock to avoid is electric-vehicle maker Tesla.
Tesla's $827 billion market cap is a reflection of its leading role in the EV industry. It's the first auto company in well over a half-century to have built itself from the ground up to mass production. The company is aiming to produce 1.8 million EVs this year and has the capacity to eventually top 2 million EVs, combined, at its four existing gigafactories.
As noted, it's also the only pure-play EV maker that's generating a recurring GAAP profit. Tesla has reported a full-year GAAP profit in each of the past three years, and looks to be well on its way to making it a fourth consecutive year in 2023.
Unfortunately, everything from the company's pricing strategy to its leadership are reasons to steer clear.
One of the prevailing Tesla bull investment theses is that the company's production efficiencies should allow it to undercut its competitors on price. When Tesla kicked off a price war with other EV producers at the beginning of the year, some investors speculated that it could be the company's production efficiencies coming to fruition.
However, CEO Elon Musk noted during the company's annual shareholder meeting that his company's pricing strategy is dictated by demand. With Tesla reducing the price of its four production models on more than a half-dozen occasions in 2023, it signals that inventory levels remain stubbornly high and/or demand for its EVs is declining. Tesla's aggressive price cuts have nearly halved its operating margin in a nine-month stretch (Sept. 30, 2022 – June 30, 2023).
To build on this point, competition is only becoming fiercer in the EV space. Tesla lacks the branding power of legacy automakers, some of which have more than 100 years of history and customer engagement they can lean on.
Another reason for concern is Elon Musk, who may be more of a liability than benefit for North America's leading EV company. While optimists strongly support Musk and his innovations, it's difficult to ignore that Musk has, on numerous occasions, drawn the ire of securities regulators. Musk also regularly promises the rollout of new innovations and products only to have those dates kicked further down the line. Tesla's valuation is bloated by Musk's unfulfilled promises.
Finally, there's Tesla's valuation, which makes no sense for an automaker. While Tesla enthusiasts would point to the company's numerous ancillary operating segments (e.g., supercharger network, energy storage, and so on) as justification for the company's aggressive earnings premium, I'd argue that Tesla has struggled to become anything more than an auto stock. Energy storage revenue actually fell in the June-ended quarter from the sequential first quarter, while its solar business has been losing money since day one.
Tesla's profitability is almost entirely dependent on selling and leasing EVs. Whereas most auto stocks trade at a mid-to-high-single-digit price-to-earnings ratio, Tesla is commanding a multiple of 78 times forecast earnings this year. That makes no sense for a company in a highly cyclical industry.
