Halfway Into 2024: 2 Underperforming “Magnificent Seven” Stocks to Buy Before They Take Off

The “Magnificent Seven” represent some of the strongest businesses around. However, a few members of this elite group have failed to live up to expectations in the first half of 2024.

Since the beginning of the year, the widely followed S&P 500 index has climbed 14.8% through June 26, but weak iPhone sales have weighed on Apple (AAPL -1.62%) shares, which are up 11.6%. Tesla (TSLA 0.23%) has been the worst performer, with a recent dip in sales from its electric cars sending the stock down 21%.

Sometimes, betting on strong companies when they are experiencing temporary weakness can pay off over the long run. Indeed, both companies have promising growth opportunities unfolding in artificial intelligence (AI), which could have a huge impact on shareholder returns over the next decade.

Here’s why these stocks are ready to take off.

1. Apple

Weak iPhone sales have weighed on Apple stock year to date, but since the company’s last earnings report in early May, the stock is outperforming the S&P 500, with the shares up 21%. The stock got a significant bounce following the company’s Worldwide Developers Conference in June, where Apple unveiled highly anticipated artificial intelligence (AI)-powered features coming to iOS 18 later this year.

Apple Intelligence will be the biggest update to Apple’s operating system in years. The AI features in this update will allow users to summarize long texts, create images, and receive personalized search assistance from Siri, just to name a few highlights.

Of course, Apple has a profitable business angle here. While iOS 18 will be free to download like previous updates, the AI features will require devices with more recent processors, such as the A17 Pro chip found on the iPhone. iOS 18 will be a huge incentive for users with older devices to upgrade, and that could lead to record iPhone revenue during the holiday quarter.

Beyond iOS 18, iPhone 16 is also expected to come in a new larger size of 6.9 inches for the Pro Max version, which could be enough to drive strong demand on its own. It’s all setting up for a stretch of improving revenue growth over the next year.

Wall Street analysts are increasingly bullish. The current consensus is that Apple’s sales will grow just 3% in fiscal 2025, but Evercore ISI recently raised its growth forecast from 4% to 7% and even sees a scenario where Apple could report double-digit top-line growth next year.

More analysts may raise their growth estimates as the launch of iOS 18 draws closer, which could send the stock even higher in the second half of 2024.

Of course, the push into AI software could also benefit Apple’s higher-margin services business (e.g., app sales) and drive above-average earnings growth. For these reasons, Apple is likely heading into a stretch of accelerating growth that could launch the stock higher over the next few years.

2. Tesla

Tesla shares have been slashed in half from their all-time high. A few reasons are to blame, including weak car demand amid rising interest rates and the uncertainty around the recent shareholder vote to reinstate CEO Elon Musk’s 2018 performance award.

With shareholders recently voting to reinstate Musk’s $56 billion pay package, it removes a major cloud over the stock since some investors were concerned that Musk might eventually leave Tesla if the vote didn’t pass. However, the stock has moved higher since the vote as investors turn their attention back to Tesla’s growth opportunities.

Tesla plans to unveil Cybercab in August, which opens up a massive market for the company. Analysts expect most of Tesla’s revenue to come from the robotaxi market over the long term, which is significant, given that the company’s $626 billion market cap is mostly based on its revenue from electric cars that generate more than 80% of the company’s revenue right now. However, RBC Capital sees 52% of Tesla’s valuation will ultimately be driven by robotaxis, 27% by full-self-driving car software, 15% by Megapack batteries, and only 6% by electric cars.

Musk compared Tesla’s robotaxi business strategy to those of services like Airbnb and Uber. Tesla will operate some of the robotaxi fleet itself, while a certain number of customers can choose to contribute their own cars to the service. Tesla aims to one day have tens of millions of cars in its fleet worldwide. It would lead to a new high-margin revenue stream in service fees flowing back to Tesla.

The robotaxi opportunity reflects Tesla’s growing capabilities in AI. It has about 35,000 Nvidia H100 graphics processing units (GPUs) currently used for AI training, but it plans to have more than twice that number by the end of 2024. These are not cheap, with each H100 selling for thousands of dollars. Tesla’s capital expenditures have quadrupled over the last four years to $9 billion and will continue to grow.

If Tesla is successful in expanding its robotaxi service over the next decade, it could have a huge impact on the company’s profitability and, therefore, lead to a higher valuation for Tesla stock. Given the company’s history of proving critics wrong, it’s worth keeping some shares of this Magnificent Seven stock among your stock holdings for a rainy day.

John Ballard has positions in Nvidia and Tesla. The Motley Fool has positions in and recommends Airbnb, Apple, Nvidia, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.