Despite Tesla's (TSLA) impressive third-quarter performance driving its stock to its largest single-day gain in over a decade, Wall Street analysts are reevaluating the company's status among the "Magnificent Seven" of U.S. stocks. Comprising Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta (META), and Tesla, these companies have led market growth in 2023, becoming potential key drivers of the current earnings season.
The group's average earnings growth for the third quarter is expected to be 18.1%, with Nvidia, Alphabet, Amazon, and Meta slated to contribute significantly to the S&P 500's earnings growth. Tesla reported a 17% increase in net profit year-over-year in Q3, marking a reversal from two consecutive quarters of decline. However, concerns linger about Tesla's overvalued fundamentals compared to its peers.
Freedom Capital Markets' Jay Woods likens Tesla's trading style to that of Bitcoin, driven more by "hope and dreams" than fundamentals. Critics suggest Tesla now mirrors the dot-com bubble behavior similar to Cisco or Intel of that era. CEO Elon Musk positions Tesla as a tech company, yet its AI and robotics ventures are years away from realization, requiring a focus on core automotive performance.
Tesla's high valuation, with a P/E ratio nearing 73, contrasts starkly with its peers, and only 40% of Wall Street analysts currently rate the stock as a "buy." This makes Tesla the least favored among the "Magnificent Seven." Meanwhile, Netflix (NFLX, Financial) emerges as a potential candidate to replace Tesla. Netflix has demonstrated strong earnings, guiding shares to all-time highs in 2024, up 55% this year, trailing only Nvidia and Meta.
Portfolio Wealth Advisors' Jesus Alvarado-Martinez highlights Netflix as a "cash flow machine," with growing free cash flow and a substantial user base. Netflix's Q3 free cash flow rose to $2.19 billion from $1.89 billion the previous year, with total 2023 free cash flow at $6.93 billion, significantly up from $1.62 billion in 2022. Analysts expect this to climb to $8.9 billion by 2025 and $11.16 billion by 2026.
Netflix is significantly favored by analysts, with 87% rating it a "buy," versus just 3% advising "sell." While Tesla's status within the "Magnificent Seven" remains uncertain, Netflix's recent rally reminds investors of its previous dominance, suggesting it may be time to reconsider the group’s composition.
