1 Stock I'd Drop From the "Magnificent Seven" and 1 I'd Add

1 Stock I’d Drop From the “Magnificent Seven” and 1 I’d Add

Sure, the Magnificent Seven is, well, magnificent. But not all are as bright and shiny as some of the others.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 27, 2024 8:30 pm EDT

The “Magnificent Seven” stocks, a group of United States tech giants, have been true marvels in the stock market over the last five years. Collectively, these stocks have seen their combined market value soar by over 250%, which is no small feat! This impressive growth underscores their dominance in the tech industry and their role in driving broader market gains.

Yet which is the brightest, and which is perhaps dulling a bit? Let’s look at one I’d avoid for now and one to pick up today, even at elevated levels.

Tesla: Avoid for now

Investors might want to think twice about holding Tesla (NASDAQ: TSLA) stock despite its past success and innovative allure. Tesla’s current valuation metrics, such as its trailing price-to-earnings (P/E) ratio of 62.72 and forward P/E of 98.04, suggest that the stock is priced for perfection. This means that any hiccough in the company’s growth or profitability could lead to significant volatility. Additionally, while Tesla has made impressive strides in production and deliveries, with over 400,000 vehicles delivered in the second quarter (Q2) of 2024, the stock’s earnings growth has not kept pace. This included a notable 45.3% year-over-year decline in quarterly earnings.

Furthermore, the company’s reliance on volatile factors such as electric vehicle (EV) demand, competition, and regulatory changes adds a layer of risk. While Tesla has a strong cash position, its free cash flow is currently negative. This may concern investors focused on long-term financial stability. Given these points, some investors might consider reallocating to more stable, consistently profitable companies within the same sector or other high-growth industries.

Consider Nvidia instead

Nvidia (NASDAQ: NVDA) continues to shine as a top pick for investors, especially given its record-breaking performance in the first quarter of fiscal 2025. The company reported an astounding US$26 billion in revenue, marking a 262% increase from the same quarter last year. This growth is largely driven by Nvidia’s dominance in the data centre market. Here, revenue skyrocketed to US$22.6 billion, reflecting a 427% year-over-year increase. Nvidia’s strong position in the artificial intelligence (AI) and cloud computing sectors has fuelled this growth. Altogether, it’s a key player in the next industrial revolution.

Moreover, Nvidia’s financials demonstrate its robust profitability and investor appeal. With a 21% increase in earnings per diluted share from the previous quarter and a significant 629% jump from a year ago, Nvidia has proven its ability to generate substantial returns. The company’s recent ten-for-one stock split also makes it more accessible to a broader range of investors, while the 150% increase in its quarterly cash dividend signals confidence in its ongoing financial strength. For those looking to capitalize on the AI boom and secure long-term gains, Nvidia remains a compelling option.