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

The S&P 500 (^GSPC 0.97%) has advanced 19% this year, and the Magnificent Seven stocks are responsible for nearly half of those gains. But most credit goes to Nvidia, and to a lesser extent Meta Platforms. The other five members of the illustrious group have underperformed, none more so than Tesla (TSLA 1.52%) and Microsoft (MSFT 1.26%).

Tesla shares have declined 3% year to date, while Microsoft shares have advanced just 9%. But Wall Street expects the stocks to move in opposite directions over the next year.

• Among the 58 analysts that follow Microsoft, the median price target is $497.50 per share. That forecast implies 22% upside from its current share price of $409.
• Among the 59 analysts that follow Tesla, the median price target is $225 per share. That forecast implies 7% downside from its current share price of $241.

Those figures imply that investors should buy Microsoft and sell Tesla. Here’s what investors should know about those Magnificent Seven stocks.

1. Microsoft

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

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

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

Microsoft reported financial results for the fourth quarter of fiscal 2024 (ended June 30) that beat estimates on the top and bottom lines. Revenue increased 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 earnings 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 forecasts the company’s earnings will grow at 13% annually over the next three years. But that consensus estimate makes the current valuation of 35 times earnings look a little pricey.

Those figures 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 watchlists right now, but plan to buy a few shares when and if the price pulls back by 10% or so. Alternatively, investors eager 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 supressed consumer spending, so the company has cut prices several times to boost demand. Tesla led the industry with 17.6% market share in battery electric vehicle sales through July. But its market share dropped 3.3 percentage points from the same period last year.

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

However, Tesla believes autonomous driving technology is its next growth wave. It already sells full self-driving (FSD) software subscriptions to consumers, and CEO Elon Musk recently said a few major automakers want to license FSD. Beyond that, FSD will also support robotaxi services. “We believe the Tesla software experience is best-in-class across all our products, and plan to seamlessly layer ride-hailing into the Tesla App,” the company wrote in a recent slide deck.

Last year, Musk told CNBC that FSD software could push Tesla’s gross margin toward 70%, nearly quadruple what it was in the recent quarter. Importantly, Tesla is arguably one of the companies best positioned to monetize autonomous driving technology due to its data advantage. It has about 1.6 billion miles’ worth of FSD data, far more than other automakers, and lots of quality data is essential for training the deep learning models that imbue FSD software with decision-making capabilities.

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

Here’s my opinion: Investors with doubts about the company’s autonomous driving ambitions should avoid the stock, and shareholders in that group should consider selling their positions. Alternatively, shareholders that are confident in Tesla’s vision for FSD and robotaxi services should continue to patiently hold the stock.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Tesla. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.