What Is the Magnificent Seven?
The Magnificent Seven (no, not the movie) is a series of stocks that represent huge tech companies that have had historic growths and momentum behind them. Typically, these stocks include names like Google, Amazon, Apple, Facebook or Meta, Microsoft, Nvidia, and Tesla.
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The name is derived from the 1960 film “Magnificent Seven,” a Western film featuring a group of gunslingers that defend a Mexican village from bandit raiders. The term was coined by analyst Michael Harnett. (via The Motley Fool)
Patel’s Suggestion
In a piece on The Motley Fool, Neil Patel spells out various reasons why Netflix should replace Tesla in the vaunted “Magnificent Seven” stock club.
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Despite the advent of AI and its incorporation in many products of huge tech firms, Tesla stock has still been struggling in this environment. On the contrary, many people expected it to excel.
The Market Is Disappointed with Tesla
In the piece, Patel looks at the share price for Tesla over the last 12 months, viewing it as proof that the rest of the market is not looking forward to Tesla’s offerings.
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“Tesla (TSLA 3.87%) 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,” Patel wrote.
Netflix’s Performance Makes it A Contender
Patel extolled Netflix’s stellar performance in recent months, which makes it a clear winner compared to Tesla’s 2% loss in share price in the same period.
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He wrote, “Instead of the electric vehicle stock, the Magnificent Seven should include Netflix (NFLX 0.70%), the world’s dominant direct-to-consumer streaming service. Its shares have soared 77% in the past year.”
Tesla Has Challenges Holding It Back
Tesla has several disadvantages that are causing investors to hold their breath on buying more stocks.
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“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,” Patel wrote.
Tesla Is Too Expensive
The primary thing on Patel’s mind that is holding Tesla back is the price investors have to pay, with no guarantee the investment will do gang-buster returns as it has in the past.
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Patel wrote, “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.”
Tesla Has an Identity Crisis
Another point Patel brought up is that Tesla is waffling between being seen as an automaker or as a tech company.
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“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,” wrote Patel.
Netflix Is Expanding
While Tesla is struggling under the weight of its slowed growth, Netflix has fewer issues these issues. Netflix has experienced a dramatic reversal with more growth projected in the future.
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Netflix added 13.1 million net new subscribers in the last quarter. This brought their total subscribers to over 260 million. Previously, Netflix had lost nearly 1.2 million subscribers during the first six months of 2022.
The Streaming Giant Is Aiming Big
Part of Patel’s excitement for Netflix is its plans to expand aggressively into the global market. It has announced expansion plans in places like India and other Asian markets. These markets are relatively untapped because they were slower to gain widespread internet access for their populations.
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Variety reported in February that Netflix is producing four original Chinese-language series, in their attempt to expand in the Southeast Asian market as opposed to their contender, Amazon Prime Video, which is decreasing its influence there.
Free Cash Flow
Patel is certain that the free cash flow (FCF) production, will turn on previously hesitant Netflix investors to the prospect of buying.
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“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,” Patel wrote.
Netflix’s Dominance Doesn’t Show Signs of Slowing
Stock investors are excited at the dominant position Netflix has carved out in the current landscape, with the future investing potential being bright. The company reported an operating margin of 21% in 2023, which is 3% higher than it was in 2022.
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Patel concluded he is not sure if Netflix will replace Tesla in The Magnificent Seven, but he is confident Netflix certainly deserves the honor of being included given its recent performance.