Should Netflix Replace Tesla in the "Magnificent Seven"?

It's hard for anyone to argue with Tesla's (NASDAQ: TSLA) performance in the past decade. Shares have soared 1,480% since late October 2014, despite their volatile journey.

There's a disruptive enterprise in a completely different industry that has done almost as well. Netflix (NASDAQ: NFLX) is up 1,300% in the last 10 years. Clearly, both businesses would have made investors a lot of money.

But should the top streaming stock replace the top electric vehicle (EV) stock in the prestigious "Magnificent Seven"? Here's why I think it most certainly should.

Tesla pumping the brakes

Tesla deserves credit for disrupting the auto industry by bringing EVs to the masses. It has quickly ascended to become one of the world's most valuable companies. And its visionary founder and CEO, Elon Musk, might be the greatest entrepreneur ever.

However, this leading EV maker has struggled in the past couple of years. Growth has slowed notably, with revenue rising 18.8% in 2023, down dramatically from previous years, before increasing by just 0.5% through the first nine months of this year. Higher interest rates have pressured demand from consumers to buy new cars, a clear indication that Tesla now resembles a traditional auto business and not some high-powered tech enterprise that can grow rapidly without any troubles.

Tesla's profits have also been impacted, with numerous price cuts implemented to spur sales. Increasing competition from both domestic and Chinese rivals hasn't made things easy, either. The Q3 2024 operating margin of 10.8% is well below the 17.2% exactly two years earlier.

Perhaps the weaker fundamentals are precisely why shares currently trade 39% off their November 2021 peak price.

Netflix pressing fast-forward

Netflix worried its shareholders when it reported losing 1.2 million subscribers in the first six months of 2022. But the streaming pioneer has come roaring back. As of Sept. 30, it counted 282.7 million customers, up 14.4% year over year. This helped drive 15% sales growth, which totaled almost $10 billion for the quarter.

Like the other Magnificent Seven constituents, Netflix is a tech-forward and internet-enabled business that benefits from a powerful secular trend, which in this instance is streaming entertainment. The business introduced streaming to the world. The popularity of its service, which gave consumers a cheaper and more convenient choice than traditional cable TV, helped spur the cord-cutting trend.

Netflix's monster success was closely watched by rival media companies. As a result, there are numerous competing streaming services on the market. But Netflix is the clear-cut leader.

It's also become an extremely profitable business. Thanks to its tremendous scale, Netflix is projected to generate between $6 billion and $6.5 billion of free cash flow in 2024.

Spencer Neumann, Netflix's CFO, believes there are still "hundreds of millions of households that aren't members." Even if half of these become Netflix customers, there is a sizable growth opportunity ahead.

Netflix is firing on all cylinders right now, while Tesla struggles to get back to its former glory. This is why the former should be included in the Magnificent Seven at the expense of the latter.

Understanding the market's perspective

As of this writing, Tesla's market cap of $789 billion is more than double Netflix's market cap of $323 billion. I think this reflects the market's ongoing love affair with the EV stock, which I don't believe is warranted.

Tesla shares trade at a steep price-to-earnings (P/E) ratio of 69. Netflix trades at a P/E multiple of 43, but its business is performing much better than Tesla's. Investors certainly still believe that the EV company will make good on its promise of introducing fully autonomous driving capabilities and launching a global robotaxi fleet, goals that I think are far from a certainty.

Netflix belongs in the Magnificent Seven over Tesla. And it looks like the better stock to buy today.