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Forget the “Magnificent Seven”: Cathie Wood Says to Buy This AI Stock Instead

Cathie Wood is one of the most famous investors working today.

Her Ark Invest funds have attracted a lot of attention for their bold and sometimes prescient calls, futuristic positioning, and willingness to share their thinking in a way that few funds are willing to do.

In 2018, Wood famously said Tesla (TSLA 0.66%) would jump to a pre-split share price of $4,000, a gain of more than 1,000%, but she was proved right just a few years later, after Tesla shares exploded in 2020, when the company turned profitable.

These days, Wood is less bullish on the group of big tech growth stocks known as the “Magnificent Seven,” which includes Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla, though the electric-vehicle maker is now significantly smaller than its peers.

In a recent thread on X, Wood said the Magnificent Seven trade has gotten too crowded, though she excluded Tesla from that grouping, referring to the remaining stocks as the “Mag 6.”

Citing a Morningstar report, Wood said that exposure to the Mag 6 among active large-cap growth managers in the U.S. is now 45% and believed smaller stocks will outperform, especially those focused on disruptive innovation.

In particular, Wood once again expressed bullishness about Tesla.

Is Cathie Wood right about the Magnificent Seven and Tesla?

Wood makes a good point about investor concentration in the Magnificent Seven, or the Magnificent Six if you exclude Tesla. In part because of the Magnificent Seven’s nickname, those stocks have attracted a surge in investor interest, especially as all seven of those stocks soared last year.

The stock market is unusually concentrated in the top stocks like the Magnificent Seven right now, but that’s arguably more a reflection of the relative strength of these stocks, and the potential growth from generative AI.

Meanwhile, small-cap stocks, as represented by the Russell 2000, have underperformed in part because of pressure from higher interest rates. Small-cap stocks tend to be more sensitive to interest rates, as they’re less likely to be profitable, more reliant on debt, and more at risk of going bankrupt.

However, there’s more to the Magnificent Seven stocks than just trendiness. All of these stocks, except for Tesla, are producing growing profits, and they all are making significant investments in generative AI, the technology that many top CEOs and investors believe could be as disruptive as the internet.

Wood continues to believe that Tesla is a buy because of its robotaxi strategy, but that’s mostly conjecture at this point. Tesla hasn’t reached Level 5 under its full self-driving program, and it’s unclear when it will win approval from regulators.

Tesla has announced a robotaxi day on Aug. 8, when it could present new information on the autonomous ridesharing program, but the company is also notorious for delaying new products and innovations.

Is Tesla a better buy than the Magnificent Seven?

At this point, Tesla looks like the riskiest stock in the Magnificent Seven, and there’s a reason it’s one of the worst performers on the S&P 500 this year.

Revenue and profit are falling amid a broader slowdown in electric vehicles. Tesla still trades at a sharp premium to traditional auto-stock peers, a sign that investors are still pricing in the robotaxi and other innovations like the autonomous robot, Optimus.

On the other hand, while the Magnificent Seven stocks look expensive, they deserve to trade at a premium. All are generating strong profit margins and solid top-line growth, with the possible exception of Apple.

Of the four Magnificent Seven stocks that have reported earnings this quarter other than Tesla, only Meta Platforms has fallen on its report, and that was in spite of strong results. Instead, investors balked at its plans to increase its spending on AI. Meanwhile, Microsoft, Amazon, and Alphabet all rose in their earnings reports, indicating more room for upside in these stocks.

While Wood’s argument is intriguing, Tesla still faces significant headwinds from the challenges in the EV market, while the rest of the Magnificent Seven stocks are executing well.

Faced with a choice between the Magnificent Seven or Tesla, investors are better off going with the Mag 7 here.

This post appeared first on fool.com

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