The “Magnificent Seven” are a group of tech stocks with a reputation for scale and quality. Among the most notable are Apple, Alphabet, and NVIDIA. These companies alone account for about 10% of the S&P 500’s market capitalization, and they’re only getting bigger. Many investors buy these stocks without a second thought, owing to their sterling reputation. However, some are not as good as others. In this article, I will explore the one Magnificent Seven stock I’d drop and one I’d add to the list.
The stock I’d drop: Tesla
Tesla (NASDAQ:TSLA) is an electric car company whose market cap is definitely typical of the Magnificent Seven but whose actual profit is anything but. Whether you measure it by net income or free cash flow, Tesla is nowhere near the level its “peers” are at. For proof, just take a look at the table below, which I compiled using data from publicly available sources (quarterly reports, etc).
| metric | Tesla | Alphabet | NVIDIA | Apple | Amazon | Microsoft | Meta |
| Net income | $14.5B | $73.8B | $29B | $101B | $30B | $82.5B | $39B |
| Sales | $96B | $307B | $60.9B | $385B | $574B | $227B | $134B |
| Free cash flow (FCF) | $2.2B | $58B | $20B | $86B | $45B | $58.6B | $33B |
| Equity | $63.6B | $254B | $43B | $74B | $171B | $238B | $153B |
As you can see, every other Magnificent Seven stock dwarfs Tesla in size. And the others are growing faster. In the first quarter, Tesla saw an unprecedented 40% decline in its car deliveries. Though the other magnificent Seven stocks haven’t reported anything for the first quarter yet, most of them did positive earnings growth in the fourth. Some, such as Meta and Alphabet, even did high double-digit growth.
The one I’d add: Alibaba
Alibaba Group Holding (NYSE:BABA) is a Chinese tech company that truly earns enough money to be grouped with the big U.S. tech stocks. Although it’s not American, it has the kinds of numbers associated with U.S. tech giants. Some of these numbers include the following:
- $130 billion in revenue, up 7.3% in the trailing 12-month (TTM) period.
- $14.1 billion in net income, up 215% in the TTM period.
- $28 billion in free cash flow, up 249% in the TTM period.
- $160 billion in equity.
As you can see, these numbers are much more typical of the Magnificent Seven stocks than Tesla’s are. At the same time, they are growing quickly, unlike Tesla’s. So, Alibaba has more “magnificent” qualities than Tesla does today.
Honourary mention: Shopify
Shopify (TSX:SHOP) is a Canadian tech stock that has sometimes been compared to the Magnificent Seven stocks. Although it is not big enough to replace Tesla on the list today, some think that it could become a Magnificent Seven stock in the future. In the trailing 12-month period, it did $10 billion in revenue, $174 million in earnings, and $770 million in free cash flow. Certainly, these aren’t Magnificent Seven numbers now, but they’re growing. In the trailing 12-month period, SHOP grew its revenue by 26%. That’s better growth than most of the Magnificent Seven can boast, and if Shopify can keep it up, then it may join that club eventually.
Magnificent Seven stocks: The foolish takeaway
The Magnificent Seven stocks are called “magnificent” for a reason: not just any company can become one. It takes vast scale to become magnificent, and Alibaba and Shopify have enough growth to join the club eventually. Tesla, however, may be on its way out.
