Within the past couple of weeks, all three major stock indexes powered their way to fresh record-closing highs. While there have been pockets of strength throughout the broader market, it's the "Magnificent Seven" stocks that are widely credited with lifting the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to new heights.
The Magnificent Seven, as the name implies, are seven of the largest and most-influential businesses in America. These seven components are (in descending order of market cap):
- Microsoft (MSFT +0.60%)
- Apple (AAPL +2.65%)
- Nvidia (NVDA +1.67%)
- Alphabet (GOOGL +1.71%)(GOOG +1.99%)
- Amazon (AMZN +0.26%)
- Meta Platforms (META +1.81%)
- Tesla (TSLA +2.96%)
Image source: Getty Images.
Aside from crushing the benchmark S&P 500 in the return column over the trailing-10-year period, the Magnificent Seven have undeniable competitive advantages. Examples include:
- Nvidia controlling upwards of 90% of all graphics processing units deployed in artificial intelligence (AI)-accelerated enterprise data centers.
- Amazon being the leader in U.S. e-commerce retail market share and global cloud infrastructure service spend (via Amazon Web Services).
- Alphabet's Google accounting for an estimated 91% of worldwide internet search share in March, per GlobalStats.
But not all of the Magnificent Seven components are ultimately "magnificent." To be brutally honest, some have been nothing short of operating duds over the past year. What follows are two Magnificent Seven stocks that should be sent to the chopping block, as well as the two phenomenal businesses that can logically replace them.
It's time to ditch this Magnificent Seven component: Tesla
As I stated plainly in late February, the Tesla growth story is officially dead. While the company has amassed a healthy cash pile to navigate a turbulent market for electric vehicles (EVs), and it's driven its first-mover advantages to four consecutive years of generally accepted accounting principles (GAAP) profit, Tesla is a shell of what it was once advertised to be.
NASDAQ: TSLA
Key Data Points
To begin with, the company has been aggressively reducing the sales price of Model's 3, S, X, and Y since the start of 2023. Between Sept. 30, 2022 and Dec. 31, 2023, Tesla's operating margin was more-than-halved to 8.2%. CEO Elon Musk has previously noted that EV demand dictates his company's pricing strategy. Yet even with aggressive price cuts, inventory levels have been stubbornly climbing.
Another issue with Tesla is that its efforts to become more than a car company have largely fallen flat. While it deserves credit for becoming the charging network of choice by many EV makers in the U.S., its Energy Generation and Storage sales growth has stalled, while its gross margin for Services remains stuck in the low-single-digits. Tesla's sales and profitability are dependent on its ability to sell and lease EVs -- and that's a segment that's under serious pressure right now.
As I've highlighted in the past, Tesla also generates a sizable percentage of its pre-tax income from unsustainable sources that include interest income on its cash and regulatory tax credits. This makes the company's premium valuation all the more egregious.
Tesla is an auto company losing its first-mover advantages that, in my view, has no business being viewed as a Magnificent Seven component.
Image source: Apple.
It's also time to put this Magnificent Seven constituent out to pasture: Apple
The other Magnificent Seven stock that should be given the proverbial heave-ho is tech titan Apple.
On the bright side, Apple's iPhone still dominates in the U.S., and the company's subscription-powered Services segment has been its most-consistent performer for years. Further, the $651 billion in share repurchases Apple has undertaken since the start of 2013 is tops among all public companies. A steady diet of buybacks has provided a boost to Apple's earnings per share (EPS).
The concern with Apple is that its growth engine has completely stalled. In fiscal 2023 (ended in late September), sales declined in all of Apple's physical product segments. Through the first three months of fiscal 2024, iPad and Wearables generated double-digit percentage sales declines from the prior-year period.
To make matters worse, preliminary research data released from IDC last week shows that Apple's iPhone shipments declined by 9.6% to 50.1 million units from the previous year. iPhone is the company's top revenue driver.
When Apple was valued at 10 to 15 times forward-year earnings, no one batted an eye if the company endured a growth hiccup. But at 27 times forecast EPS for the current fiscal year, a second consecutive year of zero or negative growth is too much of an eyesore to sweep under the rug.
Apple's best growth days may well be in the rearview mirror -- and for that reason, it no longer belongs in the Magnificent Seven.
NYSE: BRK.B
Key Data Points
The first outperformer that deserves its spot among the Magnificent Seven: Berkshire Hathaway
If Tesla and Apple are shown the door, the first no-brainer company that should be viewed as a true Magnificent Seven component is Warren Buffett's Berkshire Hathaway (BRK.A 0.16%)(BRK.B 0.11%).
While it's true that Berkshire isn't an innovator in the same capacity as either Tesla or Apple, the Oracle of Omaha and his investment team have led Berkshire to virtually unmatched annualized returns dating back more than a half-century. Since taking over as CEO in the mid-1960s, Buffett has overseen a nearly 20% annualized return in his company's Class A shares (BRK.A), and nearly doubled up the average annual total return, including dividends, of the S&P 500.
Three catalysts continue to make Berkshire Hathaway's shareholders richer over time. First off, Buffett and his team have a lengthy track record of generating big-time returns in the stock market. Berkshire's $361 billion investment portfolio contains 45 stocks and two index funds, with a heavy concentration in just four stocks (one of which happens to be Apple).
Secondly, Berkshire Hathaway owns roughly five dozen businesses, which have helped grow its operating revenue and income. Some of Berkshire's fully owned subsidiaries include insurer GEICO and railroad BNSF. A portfolio weighted heavily to cyclical businesses gets to take advantage of disproportionately long periods of economic expansion.
The third reason Berkshire's stock keeps climbing is because Warren Buffett has given the green light to more than $74 billion worth of share buybacks since July 2018. These buybacks are increasing Berkshire's EPS and making its stock even more attractive to fundamentally focused long-term investors.
NYSE: V
Key Data Points
A second outperformer that's proven it's magnificent: Visa
The other outstanding company that makes for a logical replacement for Tesla or Apple in the Magnificent Seven is payment processor Visa (V +0.61%).
While not an apples-to-apples comparison, you could certainly argue that Tesla and Apple are more innovative than Visa. But few companies have delivered for their shareholders on a more consistent basis than Visa has since its initial public offering in March 2008.
In the U.S., no payment processor accounts for a higher share of credit card network purchase volume than Visa. It was also the only payment facilitator in the U.S. that gained substantial share following the Great Recession. Since economic expansions last substantially longer than recessions, Visa benefits from the disproportionate long-term growth in spending from consumers and businesses.
It also has a lengthy growth runway beyond domestic borders. Emerging market regions like Africa, the Middle East, and Southeastern Asia remain underbanked. Visa has the ability to organically expand its infrastructure into these markets, as well as quickly reach new regions by making acquisitions, just as it did in 2016 when it acquired Visa Europe.
Best of all, Visa's management team has steered clear of becoming a lender. This strategic move ensures that it won't have to set aside capital during inevitable recessions to deal with credit delinquencies and loan losses. This is a competitive edge that's helped Visa maintain a juicy profit margin north of 50%.
