Recent turmoil in big tech stocks has left investors questioning the viability of artificial intelligence (AI) investments and the sustainability of sky-high valuations. Coupled with economic recession fears, this hesitation has cast a shadow over the market.
While the broader market has seen gains, most stocks in the “Magnificent Seven” are trailing behind the S&P 500 and its 9% increase this year. Notably, Nvidia, Meta Platforms, and Alphabet have shown strong double-digit growth, in contrast to the two worst performers in this elite group: Microsoft and Tesla.
Reevaluating Microsoft
Microsoft has garnered attention as a leading AI investment, having made significant advances in the field by pouring billions into OpenAI and infusing its Office suite with AI functionalities. These undertakings have set high expectations for the tech giant. Despite surpassing expectations in its latest quarterly report, investors seem unsatisfied.
With revenues totaling $64.7 billion for the quarter ending June 30 and a 15% year-over-year growth, Microsoft slightly outperformed analysts’ projections. Its adjusted earnings per share of $2.95 also marginally exceeded estimates. However, trading at 34 times its trailing earnings, Microsoft faces high valuation expectations, necessitating sustained growth to justify its lofty status. The company’s 7% year-to-date gains may not suffice to maintain its valuation, necessitating substantial growth triggers, possibly fueled by demand for its new AI-driven PCs.
Although facing challenges, Microsoft remains a solid long-term investment prospect given its expansive opportunities in PCs, gaming, and cloud services. While its valuation may seem stretched, the company’s growth trajectory could bolster its earnings and valuation over time, making it an enduring portfolio asset.
Evaluating Tesla’s Struggles
Tesla, the weakest link among the Magnificent Seven, has weathered a tumultuous year exemplified by a 20% dip in its stock price, mitigated only by a recent uptick. Sluggish consumer demand, exacerbated by economic headwinds and heightened competition, has stunted Tesla’s EV sales.
The company’s recent price reductions, responding to competing lower-priced EV models, have strained its profit margins. Declining margins, in turn, exert pressure on Tesla’s bottom line, making its elevated stock valuation less tenable. Amid dwindling margins and growth rates, Tesla’s financial outlook appears murky, prompting investor concerns.
With a price-to-earnings multiple of 55 and advancing competition hindering growth prospects, Tesla’s investment appeal has waned. Given the prevailing uncertainties, potential investors may find prudence in delaying stock acquisition until clearer growth indicators emerge.
TSLA Revenue (Quarterly YoY Growth) data by YCharts
Tesla’s investment viability stands in stark contrast to Amazon’s attractiveness, with Tesla’s significantly higher earnings multiple and escalating competition posing challenges to its financial upswing. Amidst this uncertainty, prudence dictates a cautious approach to investing in Tesla at this juncture.
Considering Investment in Tesla
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