Tech Sell-Off: The 1 "Magnificent Seven" Stock I'd Buy and the 1 I'd Avoid
Key Points
Alphabet looks like the best Magnificent Seven stock with its attractive valuation and growth prospects.
Tesla is one to avoid, with a sky-high valuation, declining revenue, and intensifying EV competition.
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The sector driving the stock market boom in recent years isn't as hot as it once was. Tech stocks have plunged in recent weeks, weighed down by concerns about a new rate-hike cycle and soaring artificial intelligence (AI) infrastructure spending.
Some members of the so-called "Magnificent Seven" stocks don't look all that magnificent these days. But some also look quite attractive. Here's the Magnificent Seven stock I'd buy hand over fist in the tech sell-off and the one I'd avoid.
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Buy: Alphabet
I think Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) offers the most compelling valuation in the Magnificent Seven. Shares of Google's parent trade at 19 times forward earnings.
Granted, Meta Platforms (NASDAQ: META) sports an even lower forward earnings multiple of 17.7. However, Alphabet is the clear winner with growth prospects factored in. Its price-to-earnings-to-growth (PEG) ratio, based on analysts' five-year earnings growth projections, is 0.51, compared with Meta's 1.35.
There's also only one Magnificent Seven stock that Warren Buffett and his successor, Greg Abel, have favored over the last year. Buffett personally made the call to invest $31 billion of Berkshire Hathaway's (NYSE: BRKA) (NYSE: BRKB) cash in Alphabet. Although Apple (NASDAQ: AAPL) remains Berkshire's largest holding, Alphabet has risen quickly to become the conglomerate's fourth-largest position (including both share classes).
What about Google Search revenue growth slowing significantly in the latest quarter? I view worries about the impact of AI as overblown. Sure, Google chief business officer Philipp Schindler acknowledged on the third-quarter earnings call that AI Overviews negatively impacted revenue growth due to lower monetization.
However, foreign exchange played an even bigger role. Importantly, Google is increasing the number of ads it displays within both AI Overviews and AI Mode. I fully expect AI-related monetization to improve sharply over the next couple of years.
I like Google Cloud's momentum and expect Alphabet's AI infrastructure investments to pay off. I like the optionality that self-driving car unit Waymo offers. I like Google Quantum AI's opportunity in quantum computing. And, yes, I like the long-term future for Google's underlying advertising business. This Magnificent Seven stock is the best pick to buy on the dip, in my opinion.
Avoid: Tesla
Then there's Tesla (NASDAQ: TSLA). The electric vehicle (EV) maker's valuation is the exact opposite of Alphabet's. Tesla's shares trade at a staggering 146 times forward earnings.
Don't expect Tesla's growth to paint a better picture of that valuation. The company's revenue declined slightly year over year in Q3.
The harsh reality for Tesla is that the EV market is more competitive than ever. Chinese companies, led by BYD (OTC: BYDDF) (OTC: BYDDY), present a formidable threat.
Tesla's Cybertruck has been an embarrassing flop. The company's long-promised robotaxis are finally operational but have a long way to go to catch up to Waymo's market share.
I'll admit I'm intrigued by Tesla's opportunity to sell humanoid robots. Maybe Musk is right that the company's Optimus robot will be, as he predicted in Tesla's Q3 earnings call, "the biggest product on Earth." However, his track record is spotty at best at delivering on new technology anywhere close to his predicted timeline.
Perhaps a merger with Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX, will change the dynamics for Tesla. My concern, though, is that any deal could be more favorable to SpaceX shareholders than Tesla shareholders.
Unequal magnificence
The bottom line is that the Magnificent Seven stocks aren't equally magnificent. Alphabet tops Tesla on nearly every front, in my opinion. The tech sell-off, therefore, creates a buying opportunity for Alphabet but doesn't make Tesla a great pick right now.
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Keith Speights has positions in Alphabet, Apple, Berkshire Hathaway, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, Meta Platforms, Space Exploration Technologies, and Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.
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