Although Wall Street is a bona fide moneymaker over long periods, its performance over shorter timelines is about as certain as a coin flip. For instance, each of the stock market's major indexes have traded off bear and bull markets in successive years since the decade began. These swings have been especially noteworthy in the growth-fueled Nasdaq-100.
The Nasdaq-100, which is comprised of the 100 largest nonfinancial companies listed on the Nasdaq exchange, lost a whopping 33% of its value in 2022, and has rallied 61% since the start of 2023 (as of the closing bell on Feb. 13, 2024). Despite this amazing rally, deals can still be found. But on the flip side, understand that not every component of the Nasdaq-100 is worth buying.
As we motor ahead in February, one Nasdaq-100 component stands out as a no-brainer buy, while another widely owned Nasdaq-100 stock is rife with red flags.
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The Nasdaq-100 stock that's a screaming buy in February: Sirius XM Holdings
Out of the 101 components that comprise the Nasdaq-100 -- one company has two classes of shares, thus the index has 101 and not 100 components -- the one that rises to the top as the most attractive buy in February is none other than satellite-radio operator Sirius XM Holdings (SIRI).
The biggest question for radio providers tends to be, "How healthy is the U.S. economy?" That's because radio operators rely heavily on advertising revenue. However, businesses have a tendency to pare back their ad spending at their first sign of weakness for the U.S. and/or global economy. With a couple of predictive metrics signaling a high probability of a recession in the U.S. in 2024, there's obvious concern that ad spending could fall off a cliff, at least in the short term.
The good news for current and prospective investors of Sirius XM is that this company shares few similarities with terrestrial and online radio companies.
The biggest difference of all can be seen in how Sirius XM generates its revenue. Whereas traditional radio operators are reliant on advertising revenue, less than 20% of the $8.95 billion Sirius XM recorded in net sales last year came from ads.
Sirius XM generates most of its revenue (close to 77% of net sales in 2023) from subscriptions. Subscribers are far less likely to cancel their service with Sirius XM than advertisers are to pare back their budgets with traditional radio providers during an economic downturn. This allows Sirius XM to navigate potentially choppy waters better than its media peers.
To add to the above, it's the only authorized satellite-radio provider. With the exception of utilities, which often operate as monopolies or duopolies in the areas they service, monopolies at scale are quite rare. As the only satellite-radio provider, Sirius XM possesses exceptionally strong subscription pricing power that it can lean on to outpace the prevailing rate of inflation.
Cost transparency is a competitive edge, too. While some of its expenses, such as royalty costs and content acquisition, are going to vary from quarter to quarter, transmission and equipment costs are relatively fixed. If the company continues to steadily grow its subscriber base over time, the expectation would be for higher cash flow and a beefier operating margin.
To round things out, Sirius XM stock is historically cheap. Over the trailing-five-year period, it's averaged a forward-year price-to-earnings multiple of 21. Shares can be purchased by opportunistic investors in February for about 15 times forward-year earnings. With the exception of a brief period last year, this is the lowest forward-earnings multiple Sirius XM has ever had.
The Model 3 is Tesla's top-selling sedan. Image source: Tesla.
The Nasdaq-100 stock to avoid in February: Tesla
On the other side of the coin is a historic outperformer within the Nasdaq-100 that investors would be smart to avoid in February (and perhaps well beyond). I'm talking about North America's leading electric-vehicle (EV) manufacturer, Tesla (TSLA -1.11%).
Before diving into the negatives, let me give Tesla credit where credit is due. It became the first automaker in more than a half-century to successfully build itself from the ground up to mass production. Tesla produced nearly 1.85 million EVs in 2023, which surpassed its own guidance at the beginning of the year.
Furthermore, Tesla is the only pure-play automaker that's generating a recurring profit, based on generally accepted accounting principles (GAAP). The company recently wrapped up its fourth consecutive year of GAAP profitability, while other pure-play EV makers are bleeding red.
However, Wall Street is forward-looking; and the future looks potentially frightening for Tesla and its shareholders.
The first cause for concern is Tesla's multitude of price cuts since the beginning of 2023. Models 3, S, X, and Y have undergone more than a half-dozen price reductions, which have more than halved the company's operating margin to 8.2%. This figure is noteworthy given that most legacy automakers average an operating margin of around 8%, give or take a bit in each direction.
During Tesla's annual shareholder meeting in May 2023, CEO Elon Musk made clear that his company's pricing strategy is based on consumer demand. Not only has more than a year of price reductions signaled that EV demand is tapering, but it's done little to resolve Tesla's rising inventory levels.
Tesla's efforts to become more than just a car company aren't working out, either. Energy Generation and Storage segment sales growth has stalled, and the company's Services division produced a gross margin of less than 3% during the December-ended quarter. Tesla's profitability is almost entirely reliant on selling and leasing EVs, which at the moment is a fiercely competitive segment where it's seen its operating margin plunge.
I'll also add that Tesla is generating a lot of its pre-tax income from unsustainable sources, such as interest income on its cash and regulatory tax credits given to the company for free by governments. The third and fourth quarters of 2023 saw Tesla generate 41% and 35% of its respective pre-tax income from these sources.
Another issue is that Elon Musk may be more of a risk than a benefit for his company. Musk has a long list of promises that haven't been kept, which if backed out of Tesla's valuation could send shares notably lower.
The nail in the coffin, in my view, is the company's valuation. With Tesla failing to become more than a car company, a multiple of 60 times consensus earnings in 2024 is well outside of the traditional earnings multiple range of 6 to 8 times earnings per share for auto stocks.
