Forget about Tesla: One of the unstoppable artificial intelligence (AI) stocks belongs to the ‘Magnificent Seven’ instead

The Magnificent Seven is a group of seven of the world’s largest technology stocks. Last year, they delivered an average return of 112%, which negated his 24% rise in the benchmark. S&P500 index. The seven stocks include:

1. Nvidia
2. meta platform
3. apple
4. microsoft
5. alphabet (Google)
6. Amazon
7. tesla (TSLA 2.92%)

However, the Magnificent Seven will split in early 2024, with Apple and Tesla trading in the red despite 10% profit margins. profit Some Wall Street analysts are calling for Tesla to be removed from the Magnificent Seven after its year-to-date loss of a staggering 31%.

Tesla’s core business is struggling

Tesla is working on several innovations using artificial intelligence (AI), including fully autonomous self-driving software and humanoid robots, but 85% of the company’s revenue still comes from electric vehicle (EV) sales. be. The company sold a record 1.8 million cars last year, a 38% growth compared to its 2022 performance, well above CEO Elon Musk’s 50% goal. It fell below.

Growth is likely to slow further in 2024. Tesla did not provide a forecast for deliveries, leading some analysts to speculate that deliveries will be around 2.2 million. This represents a 22% increase, and it’s also notable that Musk omitted Tesla’s usual average annual growth target of 50% in its latest financial report.

Tesla cut vehicle prices by an average of 25.1% throughout 2023 to stimulate demand in the face of difficult economic conditions, and earnings per share (earnings) fell 23% to $3.12. This puts the company at a price-to-earnings ratio of 54.7x, which is still quite expensive compared to his 31.1x P/E ratio for tech companies. Nasdaq-100 index.

So it’s clear that Tesla stock could fall further in the short term. In the long run, the story may change depending on the success of the company’s other efforts beyond EV sales.

Image source: Tesla.

Magnificent Seven stocks to replace Tesla

The current Magnificent Seven companies have one thing in common: they are developing AI technology.If Tesla is removed from the group, this is what I think. oracle (ORCL 0.31%) Would be a great alternative.

Oracle has emerged as a powerhouse in cloud computing, building the best data center infrastructure for AI developers using Nvidia’s industry-leading graphics processing units (GPUs). Chairman Larry Ellison said Oracle’s GPU cluster technology within the new Gen2 cloud infrastructure allows businesses to train AI twice as fast and at half the cost compared to competing clouds.

As a result, while Gen2 Cloud has already attracted multibillion-dollar contracts from some of the AI ​​industry’s leading startups, from Cohere to Elon Musk’s xAI, Oracle says it simply can’t keep up with demand. Ellison says. The company has 40 of his AI reservations worth at least $1 billion each, but they are not online as they wait to build additional infrastructure.

Oracle said it had 66 active data center regions worldwide during the second quarter of fiscal 2024 (ending November 30, 2023). We are currently upgrading everything to align with AI and are building another 100 units, which will be a significant increase in the company’s footprint.

Oracle Cloud Infrastructure revenue is skyrocketing

Oracle reports Gen2 Cloud revenue under the Oracle Cloud Infrastructure (OCI) segment. OCI’s revenue rose 49% year-over-year to $1.8 billion during the third quarter, making it the company’s fastest-growing component. Although it still only accounts for 13.5% of Oracle’s total revenue, Ellison believes it won’t be long before OCI becomes a big contributor, with OCI growing by 50% over the next few years.

Oracle’s data center technology is also unique in that it is fully automated. This means you can scale incredibly well and be highly profitable because there is very little cost difference between operating 10 locations and 100 locations.

On that note, Oracle’s third-quarter total revenue rose only 7% to $13.3 billion, while earnings per share rose 25% to $0.85. While prudent cost management contributed to the strong performance, infrastructure gross margins also increased significantly. The latter will continue to improve as more data centers come online.

Oracle stock is much cheaper than Tesla

Oracle stock has risen 22.8% since the beginning of the year, more than double the gain of the S&P 500 index and near its all-time high. The company is scheduled to close its 2024 fiscal year on May 31, and Wall Street expects it to post earnings of about $5.59 per share.

This gives Oracle stock a P/E of 22.8, less than half of Tesla’s P/E. This is a 27% discount to the Nasdaq 100 index, suggesting that Oracle is significantly cheaper than most of its large technology peers.

But it gets better. Oracle’s order book (which is expected to eventually turn into revenue) hit a record high of $80 billion in the third quarter, up 29% year over year. Bookings during the quarter clearly grew much faster than the company’s revenue, suggesting that the company’s sales could accelerate in the near future.

Given Oracle’s relatively cheap valuation, OCI’s rapid growth, and large reserve balance, the company’s stock price could be poised for a steady rise over several years. In fact, as of this writing, Oracle is worth $351 billion, and I think its valuation could reach $1 trillion within the next 10 years.