Seven U.S. companies have been so successful that when grouped, their value exceeds the combined value of the stock markets in Canada, Japan, and the U.K. Those seven companies, aptly called the Magnificent Seven, also account for more than one-quarter of the S&P 500 and nearly one-half of the Nasdaq Composite.
The Magnificent Seven are listed alphabetically below. Beside each stock is Wall Street's consensus price target and the upside implied by the current share price.
| Stock | Consensus Price Target | Implied Upside from Current Price |
|---|---|---|
| Alphabet | $157 | 3% |
| Amazon | $185 | 17% |
| Apple | $200 | 3% |
| Meta Platforms | $398 | 1% |
| Microsoft | $425 | 5% |
| Nvidia | $650 | 5% |
| Tesla | $234 | 28% |
Sources: YCharts and CNN.com.
Two companies stand out in terms of the upside implied by the median price target. Specifically, Wall Street analysts see Amazon (AMZN 3.43%) and Tesla (TSLA -1.11%) as the best Magnificent Seven stocks to buy right now.
1. Amazon
Amazon struggled through several quarters of rising costs and conservative consumer spending, but its business is on the rebound. Third-quarter revenue increased 13% to $143 billion due to strong growth in advertising services, and more measured growth in the cloud computing and retail segments. On the bottom line, GAAP net income tripled to $9.9 billion as cost reduction efforts continued to take root. Investors should expect more of the same in the future.
Amazon has a strong presence in three markets. It runs the largest e-commerce marketplace in North America and Western Europe. It is the third-largest ad tech company in the world, and it is the global leader in cloud infrastructure and platform services. To quantify those opportunities, the retail e-commerce, digital advertising, and cloud computing markets are forecasted to grow at annual rates of 8%, 16%, and 14%, respectively, through 2030.
Amazon has a clear path to double-digit sales growth over the same period, but leadership in cloud computing leaves room for upside. Demand for artificial intelligence (AI) tools is expected to gain steam in the coming years, and businesses will need cloud services to build and power those tools. Amazon is arguably the cloud provider best positioned to benefit from AI, a market forecasted to grow at 37% annually through 2030.
With that in mind, Wall Street expects Amazon to grow sales at 11% annually over the next five years. That consensus estimate makes the current valuation of 3 times sales seem reasonable. Patient investors should consider buying a few shares today.
2. Tesla
The past year has been challenging for Tesla. Demand faltered as interest rates increased, so the company resorted to price cuts. That blunted sales growth, reduced margins, and slashed profits. Fourth-quarter revenue rose just 3% to $25 billion, and non-GAAP net income declined 39% to $2.5 billion. Management also said vehicle volume will grow more slowly in 2024 as the company works to launch its next-generation vehicle. For context, production increased by 35% and deliveries increased by 38% in 2023.
On the bright side, that next-generation vehicle will put Tesla in a more affordable market segment. The starting price is rumored to be about $25,000, which would make it one of the cheapest electric cars (if not the cheapest) on the market. A new manufacturing process will make that price possible. Tesla thinks its "unboxed" process could cut production costs in half and reduce its factory footprint by 40%.
Tesla led the world in battery electric vehicle sales through November, with a 19.2% market share. The next-generation vehicle could help the company maintain its leadership. More importantly, it should expand its driver base, creating upsell opportunities with insurance, full self-driving (FSD) software, premium connectivity, charging, and other adjacent services.
Ultimately, management expects FSD software to be the most important source of profitability. Tesla already sells FSD subscriptions in certain geographies (and demand should increase as it moves toward full autonomy), but it also plans to monetize FSD with robotaxi services and licensing deals. CEO Elon Musk believes those offerings could push gross margin toward 70%. That would be a dramatic improvement from 17.6% in the fourth quarter.
Tesla is a tricky stock to value because much of the growth narrative is theoretical right now. To that end, top-line estimates vary widely among Wall Street analysts, but the consensus calls for 18% annual sales growth over the next five years. In that context, the current valuation of 6.6 times sales seems reasonable, so Tesla bulls should consider buying a small position.
Conversely, I wouldn't fault investors for passing on the stock today. FSD software and robotaxi services are core to the investment thesis, and those products are mired in uncertainty.
