Finance
Cathie Wood says she should buy these AI stocks instead
Cathie Wood is one of the most famous investors today.
Its Ark Invest funds have attracted a lot of attention for their bold and sometimes prescient calls, their futuristic positioning and their willingness to share their ideas in a way that few funds are willing to do.
In 2018, Wood famously said it Tesla (NASDAQ: TSLA) would jump to a pre-split share price of $4,000, a gain of more than 1,000%, but she was proven right just a few years later, after Tesla stock exploded in 2020 as the company became profitable.
These days, Wood is less bullish on the group of big tech growth stocks known as the ‘Beautiful seven,” inclusive Microsoft, Apple, Nvidia, Alphabet, Amazon, Metaplatformsand Tesla, although the electric vehicle maker is now significantly smaller than its peers.
In a recent thread on
Citing a Morningstar report, Wood said exposure to the Mag 6 among active large-cap growth managers in the US now stands at 45% and that he believed smaller stocks will outperform, especially those focused on disruptive innovation .
In particular, Wood again expressed his optimism about Tesla.
Is Cathie Wood right about the Magnificent Seven and Tesla?
Wood makes a good point about the concentration of investors in the Magnificent Seven, or the Magnificent Six if you exclude Tesla. Partially because of the Magnificent Seven’s nickname, these stocks have generated tremendous interest from investors, especially since all seven stocks soared last year.
The stock market is currently unusually concentrated in the top stocks like the Magnificent Seven, but that’s probably more a reflection of the relative strength of these stocks and the potential growth of generative AI.
Meanwhile, small-cap stocks, as represented by the Russell 2000, have underperformed in part due to the pressure of higher interest rates. Small-cap stocks tend to be more sensitive to interest rates because they are less likely to be profitable, more dependent on debt and have a greater risk of going bankrupt.
There’s more to the Magnificent Seven stocks than just trends, though. All of these stocks, except Tesla, are generating growing profits, and all are making significant investments in generative AI, the technology that many top CEOs and investors believe could be as disruptive as the internet.
Wood continues to believe Tesla is a buy because of its robotaxi strategy, but that’s mostly conjecture at this point. Tesla has not yet reached Level 5 of its full self-driving program, and it is unclear when it will receive regulatory approval.
Tesla has announced a robotaxi day on August 8, when it could present new information about its autonomous ridesharing program, but the company is also known for delaying new products and innovations.
Is Tesla a better buy than the Magnificent Seven?
Right now, Tesla seems like the riskiest stock in the Magnificent Seven, and there’s a reason it’s one of the worst performing stocks on the market. S&P500 this year.
Sales and profits are falling due to a broader slowdown in electric vehicles. Tesla is still trading at a steep premium to traditional auto stocks, a sign that investors are still pricing in the robotaxi and other innovations like the Optimus autonomous robot.
On the other hand, while Magnificent Seven shares look expensive, they deserve to trade at a premium. All generate strong profit margins and solid revenue growth, with the possible exception of Apple.
Of the four Magnificent Seven stocks that reported profits this quarter, excluding Tesla, only Meta Platforms fell in the report, despite strong results. Instead, investors are resisting plans to increase spending on AI. Meanwhile, Microsoft, Amazon and Alphabet all rose in their earnings reports, indicating there is more room for upside in these stocks.
While Wood’s argument is intriguing, Tesla still faces significant headwinds from the challenges in the EV market, while the rest of the Magnificent Seven stocks are doing well.
Faced with the choice between the Magnificent Seven or Tesla, investors would be better off choosing the Mag 7 here.
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Forget the “Magnificent Seven”: Cathie Wood says to buy this AI stock instead was originally published by The Motley Fool
