The US Magnificent Seven stocks of Apple, Nvidia, Meta Platforms, Microsoft, Telsa, Alphabet, and Amazon are no doubt powerhouse businesses in the US market.
But some professionals — including fund managers and ASX ETF index providers — do not deem all of these companies to be great investments right now.
We've noticed that several ASX exchange-traded funds (ETFs) that track indices based on quality metrics, not market capitalisation, do not include all of the Magnificent Seven stocks.
This means the index providers have judged that other stocks are more appealing than some of the Magnificent Seven based on metrics such as high return on equity (ROE), low debt, earnings stability, and wide moats.
The VanEck MSCI International Quality ETF (ASX: QUAL) is invested in 300 companies. It holds Alphabet, Microsoft, Meta Platforms, Nvidia, and Apple, but not Tesla or Amazon.
The Betashares Global Quality Leaders ETF (ASX: QLTY) is invested in 150 companies. It holds Meta Platforms, Alphabet, Microsoft, and Nvidia, but not Tesla, Amazon, or Apple.
The VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT) is invested in 51 companies. It holds Alphabet, Amazon, and Microsoft, but not Meta Platforms, Nvidia, Apple, or Tesla.
The common thread among these three ASX ETFs is that none of them are invested in Tesla, the electric vehicle (EV) manufacturer.
Nick Griffin, chief investment officer at Munro Partners, provides some insight as to why Tesla is being excluded for investment.
Griffin recently told The ABC's The Business program that Munro's main fund does not hold Tesla on valuation grounds.
He said:
We like [Tesla] a lot, but the valuation, you know, makes it hard to get the maths to work.
So, even though the earnings may grow from here, the multiple may come down and so the share price might not actually move that much and that's because a lot of people are already pricing in a lot of the good news at Tesla and we think they've probably priced in too much.
The Tesla share price has fallen 11.86% in the year to date (YTD).
No other Magnificent Seven stock has fallen that far over the same time frame.
The closest is Apple shares, which are down 3.55% YTD.
My US colleague Howard Smith reported that Tesla shares continued their freefall this week when rival Chinese EV manufacturer BYD announced a new driver assistance system.
The system will be available in most of BYD's models, even the cheap ones.
BYD said its driver assistance system will rely on DeepSeek's AI.
Meantime, Tesla is still waiting for approval from China's regulators for a driver-supervised version of its autonomous driving software.
Despite the 12% dip, Tesla shares are still the most expensive of the Magnificent Seven based on the price-to-earnings (P/E) ratio.
Tesla's P/E on an annual basis for 2024 is 198.13x.
This compares to 23.53x for Alphabet Class A, 23.68x for Alphabet Class C, 24.54x for Meta Platforms, 37.44x for Apple, 37.88x for Microsoft, 39.70x for Amazon, and 51.14x for Nvidia,
My US Fool colleague Sean Williams thinks Tesla (and other companies, including Apple) have an earnings quality problem.
Williams says Tesla reported $8.99 billion in pre-tax income in 2024. But $2.76 billion was from selling regulatory tax credits, and roughly $1.57 billion was interest income on cash.
Williams wrote:
While I'm not faulting Tesla for taking advantage of these opportunities, it's worth pointing out that more than half of its pre-tax income originates from unsustainable, non-innovative sources.
Howard reports that some investors are nervous about how much Tesla CEO Elon Musk has on his plate.
Not only does he have a new role cutting costs for the US Government, but he's now leading a consortium that has proposed to buy ChatGPT developer, OpenAI.
While some investors may be feeling nervous about Tesla's future and current valuation, Musk remains bullish.
In a recent earnings call with investors, Musk said he sees Tesla becoming the world's most valuable company.
He said:
I'm not saying it's an easy path, but I see a path to Tesla being the most valuable company in the world by far.
Not even close, like maybe several times more than — I mean, there is a path where Tesla is worth more than the next top five companies combined.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.