Forget Tesla: We think the ‘Magnificent Seven’ should replace this stock

tesla (TSLA 2.92%) It was a great long-term investment. Since the company went public in 2010, its stock price has increased more than 10,000%. This meteoric rise earned the company a spot on the Magnificent Seven (a list of superstars). alphabet and meta platform.

While most of the Magnificent Seven stocks have done very well over the past three years, Tesla stock has actually lost That’s almost a third of its value. What was wrong with Tesla and the rest of the Magnificent Seven? It’s not that Tesla is a bankrupt company, it’s that its business model relies on different economics. Manufacturing cars is capital intensive and has low profit margins in the long run. Meanwhile, tech companies like Alphabet and Meta have fewer assets. These businesses generate high profit margins and can scale much more quickly than manufacturers of physical products.

Currently, there is one company that has a lot in common with the rest of the Magnificent Seven, but isn’t getting the attention it deserves. The company’s market capitalization has recently surpassed Tesla’s, and I wouldn’t be surprised if it replaces Tesla among the Magnificent Seven as early as this year.

This is the next trillion dollar stock

The company is visa (V -0.22%), one of the most overlooked stocks in recent memory. Since going public in 2007, the stock price has increased nearly 1,900%. Its performance is comparable to or better than some of the Magnificent Seven stocks. For example, Alphabet’s stock price rose only 1,300% over the same period. While this is still an impressive performance, many investors may be surprised to learn that Visa has beaten some of the most famous growth stocks on the planet.

V data by YCharts

To be fair, Magnificent Seven stocks like Tesla have grown much faster than Visa over a short period of time. For example, from 2020 to 2022, Tesla’s market capitalization expanded from about $50 billion to about $1.2 trillion. Over the same period, Visa’s market capitalization remained largely unchanged, hovering at just over $400 billion.

Of course, there are pitfalls to Tesla’s heroic achievements. It wasn’t always smooth sailing. At the moment, Tesla’s market cap is below that of Visa, having given up most of its gains in recent years. Meanwhile, Visa’s market capitalization continues to rise steadily. As we’ll see, that’s because Visa shares more in common with other Magnificent Seven stocks than Tesla. This commonality could help the company become the next trillion-dollar stock.

V Market Capitalization Data by YCharts

something is not similar to something else

When you compare Visa and Tesla to the rest of the Magnificent Seven, both companies stand out, but in different ways. Looking at each company’s operating profit margins (an indicator of a company’s profitability), Tesla’s capital-intensive business model stands out. It costs a lot of money for the company to produce its vehicles, and competition in the electric vehicle market is fierce, so there is a limit to how much it can charge.

Tesla’s operating margin is just 9.2% (the worst metric among the Magnificent Seven stocks), while Visa actually tops the list with an operating margin of 67.3%. That’s no fluke either. Since 2010, none of the Magnificent Seven stocks listed below have beaten Visa on this profitability metric.

META Operating Margin (TTM) Data by YCharts

Why is Visa’s operating margin significantly higher than Tesla’s? It’s because it operates with relatively little capital tied up in expensive hard assets, while benefiting from network effects.

Consider Alphabet, the parent company of Google, and Meta Platforms, the parent company of Facebook. Both companies essentially run a ton of software, which is used by billions of users. The more people use Google and Facebook, the more valuable those platforms become. For example, Google obtains more data to further improve its search results algorithms. Meanwhile, Facebook will be able to generate more data and better serve content to its user base. In this way, both companies become stronger as they grow in size.

Tesla also becomes more powerful as it grows, gaining greater scale and reputation, but it costs a lot of money to maintain this growth. For example, if demand exceeds manufacturing capacity, a new factory must be built at great expense. Google and Facebook, on the other hand, need little investment to grow their user base. Visa has similar advantages.

More than 90% of Americans now own a debit or credit card. About half of these cards work on Visa’s payment network. There are good reasons for this. Merchants don’t want to accept payment methods used by a small number of shoppers. On the other hand, shoppers don’t want to use payment methods that only a few merchants accept. The natural result is industry concentration and high barriers to entry, limiting competition. The more Visa grows, the more powerful it becomes. Also, since most of the business is run on software, profitability metrics are consistently high.

In many ways, Visa is a boring company. He is not deeply involved in the latest trends such as artificial intelligence, electric cars, and virtual currencies. However, its business model is profitable, allows for long-term growth, and has a durable competitive advantage. The same cannot be confidently said about Tesla. Simply put, don’t be surprised if Visa replaces Tesla with the Magnificent Seven one day.