Market reassessment of the "Mag 7": Tesla out, Netflix on top?

If Tesla wants to continue to have a place among the "Big Seven" in the US stock market, it still needs to work hard.

On October 27th, Seana Smith, an analyst at Yahoo Finance, stated that Tesla's fundamentals have been overly hyped, coupled with recent poor performance, overvaluation, and excessive reliance on its core automotive business. Investments in AI and robotics are expected to take several years to pay off, leading to questions from Wall Street about whether Tesla can continue to stay in the ranks of the "Big Seven" in the US stock market.

As of the afternoon of October 25th, just slightly over 40% of analysts covering Tesla rated it as a buy. According to Bloomberg data, this makes Tesla the least favored stock among analysts in the "Big Seven" in the US stock market.

Among the substitutes, Netflix is the most popular. Netflix has maintained strong free cash flow, with good profitability and guidance. Analysts are generally bullish on Netflix, with 87% of analysts giving it a buy rating, while only 3% recommend selling.

The "Big Seven" in the US stock market include Nvidia, Apple, Google, Amazon, Meta, Microsoft, and Tesla, which dominated the market in 2023 and are expected to be key drivers of the US stock market during the third-quarter earnings season. According to FactSet data, the year-over-year growth rate of the "Big Seven" in the US stock market is expected to reach 18.1% in the third quarter.

Tesla Out of the Game?

Tesla's third-quarter earnings report was surprisingly strong, ending two consecutive quarters of profit declines with a 17% profit growth, marking its largest single-day gain in over a decade.

However, Wall Street is once again reassessing Tesla's position among the "Big Seven" in the US stock market, as the strong third-quarter earnings are not enough—Tesla still risks falling behind in large tech companies due to its overhyped fundamentals.

Jay Woods, Chief Global Strategist at Free Capital Markets, likened Tesla to Bitcoin, believing that its stock trading is more based on "hope and dreams" rather than fundamentals. In the morning briefing on Yahoo Finance, Woods warned:

"Tesla has had its moments of glory... In my view, it's more like Cisco or Intel during the dot-com bubble era, and now we are starting to focus on other things."

Although Tesla's CEO Musk often views Tesla as a tech company, investments in AI and robotics may take several years to pay off. Meanwhile, Tesla must rely on improving its core automotive business to drive growth, which contrasts sharply with the other "Big Seven."

Veteran tech investor Dan Morgan told Yahoo Finance:

"I've been in the tech industry since 1990, and I remember the 'Four Horsemen': Cisco, Intel, Dell, and Microsoft. We didn't include car stocks in that lineup." In addition, Tesla's recent poor performance and high valuation have further weakened its position among the "Big Seven" in the US stock market. According to Yahoo Finance data, Tesla's forward P/E ratio is close to 73 times, much higher than other companies in the "Big Seven" in the US stock market.

Netflix replacing Tesla?

Ayako Yoshioka from Wealth Enhancement Group told Yahoo Finance that among the companies poised to replace Tesla in the "Big Seven" in the US stock market, Netflix is the "most suitable" - benefiting from strong earnings and good guidance, Netflix's stock price recently hit a historic high.

Since the beginning of the year, Netflix's stock price has risen by 55%, ranking behind only Nvidia and Meta in the "Big Seven" in the US stock market. Over the past year, Netflix has accumulated a gain of over 84%.

Jesus Alvarado-Martinez, a portfolio wealth advisor, stated that the key to becoming one of the "Big Seven" in the US stock market lies in "cash flow," and Netflix "completely meets this criterion." Alvarado-Martinez said:

"Netflix's free cash flow has been consistently strong... excellent earnings, excellent free cash flow, and excellent user numbers."

Since the pandemic, Netflix's free cash flow has steadily increased, reaching $2.19 billion in the third quarter, a 15.87% year-on-year increase from $1.89 billion in the same period last year; Netflix's cumulative free cash flow for 2023 reached $6.93 billion, compared to $1.62 billion in 2022.

US Bank analyst Jessica Reif Ehrlich believes that Netflix's continuously growing free cash flow is the "catalyst" for the stock, expecting free cash flow to rise to $8.9 billion in 2025 and reach $11.16 billion in 2026