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Forget Tesla: I Think This Stock Should Replace It in the “Magnificent Seven”

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Thanks to strong corporate results, as well as the ongoing artificial intelligence (AI) boom, the so-called “Magnificent Seven” stocks are soaring to new heights. All of these companies have seen their share prices rise in the last 12 months, except for one.

Tesla (NASDAQ: TSLA) shares are down over 2% during that time frame. That’s a sign that the market has grown pessimistic about the business and its prospects.

Instead of the electric vehicle stock, the Magnificent Seven should include Netflix (NASDAQ: NFLX), the world’s dominant direct-to-consumer streaming service. Its shares have soared 77% in the past year. Here’s my case.

Tesla is an expensive automaker

After years of outsize growth and improving profitability, Tesla has hit a roadblock. Higher interest rates and intense competitive pressures have pumped the brakes on revenue gains, with sales up just 3% in the fourth quarter of last year. And in 2023, Tesla’s gross margin was 18.2%, down from 25.6% in the previous year.

If you want to view things from a positive angle, Tesla’s valuation has come down due to the stock’s 17% decline in the trailing-three-year period. Shares trade at a forward price-to-earnings (P/E) ratio of about 61 today.

However, this is still a very expensive price to pay for a struggling enterprise. I think the valuation still prices in the assumption that Tesla will get back to posting the monster growth it did in prior years, with margin expansion a sure thing.

I also view the valuation as reflecting investor optimism about Tesla being categorized as a tech company and not an automaker. To its credit, the business is truly innovative and disruptive, and there’s still the possibility of introducing full self-driving functionality at some point in the future. But as things stand right now, it’s still a car manufacturer.

Press play on Netflix

While Tesla struggles, Netflix is thriving. The leading streaming entertainment provider added 13.1 million net new subscribers last quarter, bringing the total to 260.3 million. This is a huge reversal from nearly two years ago, when Netflix lost 1.2 million customers in the first six months of 2022, and shareholders fled for the exits.

Last quarter, Netflix registered member growth in all its geographic regions, boosted by the successful launch of a cheaper, ad-supported tier, as well as efforts to crack down on password sharing. The company is dipping its toes in the live sports and entertainment space with its WWE partnership.

Netflix still has a huge opportunity to gain subscribers. According to CFO Spence Neumann, there are about 1 billion broadband-enabled households in the world (excluding China, where Netflix isn’t available). This gives the business a massive expansionary runway.

With Netflix’s first-mover advantage in the industry and a dominant market position with lots of growth potential, investors might not realize that the company is also booming from a profitability perspective. Netflix reported an operating margin of 21% in 2023, up from 18% in 2022. Executives believe this metric can continue expanding in the years ahead.

Plus, here’s something the bears never thought would happen: Positive free cash flow (FCF) production is a usual occurrence these days. Netflix is forecasting FCF of $6 billion this year, after raking in $6.9 billion in 2022. The leadership team will use this to repurchase shares.

I’m not sure if Netflix will replace Tesla in the Magnificent Seven anytime soon, but the latter certainly deserves to be placed in that category.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Tesla. The Motley Fool has a disclosure policy.

Forget Tesla: I Think This Stock Should Replace It in the “Magnificent Seven” was originally published by The Motley Fool

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