Tesla Stock vs. Microsoft Stock: Wall Street Says Buy One and Sell the Other

The S&P 500 (^GSPC 0.97%) is up 19% this year, and Magnificent Seven shares are responsible for nearly half of those gains. But the biggest credit goes to him Nvidiaand to a lesser extent Meta platforms. The other five members of the illustrious group performed poorly, none more than adze (TSLA 1.52%) and Microsoft (MSFT 1.26%).

Tesla shares are down 3% year-to-date, while Microsoft shares are up just 9%. But Wall Street expects stocks to move in opposite directions over the next year.

• Among the 58 analysts who follow Microsoft, the average price target is $497.50 per share. This forecast implies a 22% upside to the current share price of $409.
• Among the 59 analysts who follow Tesla, the average price target is $225 per share. This forecast implies a 7% downside to the current share price of $241.

These numbers suggest that investors should buy Microsoft and sell Tesla. Here’s what investors should know about these Magnificent Seven stocks.

1. Microsoft

Microsoft is the largest software company and the second largest public cloud in the world. Its strength in software comes primarily from office productivity (Microsoft 365), enterprise resource planning (Dynamics 365) and business intelligence products (Power BI), three markets in which the company enjoys a leadership position.

Microsoft is well-positioned to gain share in those software categories with the help of new generative artificial intelligence (AI) assistants that automate workflows like drafting text and organizing data. The number of customers using Microsoft 365 Copilot increased by more than 60% sequentially in the June quarter.

Microsoft Azure trails Amazon Web services from cloud infrastructure and platform services revenue, but the power of machine learning and artificial intelligence has helped Azure gain a percentage point in market share over the past year. The number of Azure AI customers grew by nearly 60% during that time, according to CEO Satya Nadella.

Microsoft reported financial results for the fourth quarter of fiscal 2024 (ended June 30) that beat top and bottom estimates. Revenue rose 15% to $64.7 billion and GAAP earnings rose 10% to $2.95 per diluted share. However, the acquisition of video game publisher Activision was a 3 percentage point tailwind to revenue growth, but a 2 percentage point headwind to revenue growth.

Going forward, Microsoft is one of the companies best positioned to monetize generative AI due to its strength in enterprise software and cloud computing. Indeed, Wall Street expects the company’s earnings to grow 13% annually over the next three years. But that consensus estimate makes the current valuation of 35 times earnings look a little expensive.

These numbers give a PEG ratio of 2.7, a slight premium to the three-year average of 2.4. I think investors should keep Microsoft on their watch lists right now, but plan to buy some shares when and if the price drops 10% or so. Alternatively, investors looking to own this stock could buy a very small position today.

2. Tesla

Tesla has struggled with macroeconomic headwinds in recent quarters. Inflation and high interest rates have suppressed consumer spending, so the company has cut prices several times to stimulate demand. Tesla led the industry with a 17.6 percent market share in battery electric vehicle sales through July. But its market share fell by 3.3 percentage points compared to the same period last year.

Weak demand and lower prices led to disappointing financial results in the second quarter. Revenue rose 2% to $25.5 billion, operating margin fell 3.3 percentage points and non-GAAP net income fell 43% to $0.52 per diluted share. Tesla has now missed Wall Street’s earnings estimates for the past four quarters, which partly explains why the Magnificent Seven has been the worst-performing stock this year.

However, Tesla sees self-driving technology as the next wave of growth. It already sells full subscriptions to its self-driving software (FSD) to consumers, and CEO Elon Musk recently said several major automakers want to license FSD. In addition, FSD will also support robotaxi services. “We believe the Tesla software experience is best-in-class across all of our products, and we plan to put a seamless layer on the Tesla app,” the company wrote in a recent slide deck.

Last year, Musk told CNBC that the FSD software could push Tesla’s gross margin to 70 percent, nearly four times what it was last quarter. Importantly, Tesla is arguably one of the companies best positioned to monetize self-driving technology because of its data advantage. It has about 1.6 billion miles of FSD data, far more than any other automaker, and a wealth of quality data is critical to training deep learning models that enhance FSD software with decision-making capabilities.

Wall Street expects Tesla’s earnings to grow 12% annually over the next three years, making its current valuation of 68 times earnings look outrageously expensive. That said, revenue estimates will likely rise substantially if and when Tesla begins offering robotaxi services at scale.

Here’s my take: Investors with doubts about the self-driving company’s ambitions should avoid the stock, and shareholders in that group should consider selling their positions. Alternatively, shareholders who believe in Tesla’s vision for FSD and robotaxi services should continue to patiently own the stock.