Is now the time to buy the 2 worst performing stocks of the ‘Magnificent Seven’?

Big tech stocks have been struggling lately as investors grow concerned about whether investments in artificial intelligence (AI) will pay off and whether valuations have simply become too high. Looming worries about a recession are also a reason why markets appear to be under pressure.

Most of the “Magnificent Seven” stocks underperform S&P 500 and its gains of 9% this year. While the actions of Nvidia, Meta platformsand Alphabet are growing by double digits this year, others are lagging behind. The two worst performing stocks in the Magnificent Seven are Microsoft (MSFT 0.83%) and adze (TSLA 0.58%).

Is now a good time to add these stocks to your portfolio?

1. Microsoft

Microsoft has been one of the big AI stocks it’s owned in the past couple of years, as it’s invested billions in OpenAI and enhanced its Office suite with AI capabilities. And so expectations are high for the computer maker. While the company beat expectations in its most recent quarterly report, investors may have been looking for a lot more.

Sales for the period ended June 30 totaled $64.7 billion and were up 15% year over year. That came in slightly higher than the $64.4 billion analysts were expecting. Adjusted earnings per share of $2.95 were also slightly higher than the $2.93 profit per share that analysts were expecting.

While Microsoft has a stellar business and many opportunities to benefit from the growth of AI, the bar is high because it is one of the most valuable companies in the world and trades at 34 times its trailing earnings. For Microsoft to maintain this high valuation, it may need to do more than beat earnings. While its 7% gains this year aren’t too bad, for it to be a strong performer, it will likely need to generate a lot more growth. The big test may be how strong demand will be for its new AI-powered PCs and whether they can serve as a catalyst for the business.

In the long run, however, Microsoft may still be a great stock to own given its vast growth opportunities in PCs, gaming and cloud computing. The business is robust, and while the valuation may seem a bit high, as the company grows in size, so will its earnings, which will improve its valuation. If you’re looking for a stock to buy and hold for decades, Microsoft can make a good addition to your portfolio today.

2. Tesla

The worst performing stock in the Magnificent Seven is Tesla. If it weren’t for a recent rally it’s been in, it would be down a lot more than the mere 20% it’s currently at. That’s how bad it’s been a year for the electric vehicle (EV) maker.

Consumer demand for Tesla electric vehicles has not been as strong as in the past, and you can blame some of that on poor economic conditions as well as increased competition. Tesla has cut prices in response to other electric vehicle manufacturers offering products at lower prices.

The problem is that Tesla needs higher prices to keep its margins high. Without big margins, that puts pressure on the bottom line. And the lower its bottom value, the more expensive the stock is on a price-to-earnings basis. Investors have typically been willing to pay a premium for Tesla stock, but with the business struggling to generate growth these days, it’s no longer as easy to justify.

Both the company’s margins and growth rates have trended in the wrong direction in recent quarters, creating cause for alarm for investors.

TSLA revenue data (quarterly annualized growth) by YCharts

Tesla isn’t as clear on an acquisition as Amazon seems to be. It trades at a higher earnings multiple (55) and increasing competition could make it difficult for it to improve its financials anytime soon. With much uncertainty ahead, investors may want to hold off on buying stocks right now.