These 2 Magnificent Seven stocks look the least overvalued, says expert

Valuation guru Aswath Damodaran, a professor at NYU, analysed the ‘Magnificent Seven’ stocks and ranked them from least to most overvalued.

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The ‘Magnificent Seven’ stocks are a group of seemingly unstoppable US tech stocks. The club is made up of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

Collectively, the Magnificent Seven added $5.1trn in market cap in 2023.

In fact, these seven companies alone accounted for over 60% of the S&P 500’s total return in 2023.

Many investors have been left wondering if it’s too late to add names from this list to their own portfolios.

Fortunately Aswath Damodaran, a renowned expert in the field of valuation, has revealed what he believes are the two best buys right now out of the seven.

Valuation guru

Aswath Damodaran is a professor at New York University’s Stern School of Business. He teaches corporate finance and equity valuation.

The professor has a track record of identifying undervalued stocks with significant upside potential. Notably, he was bullish on Meta (formerly Facebook) in 2022 when it was trading at only $100. Today, it trades at over $450.

The two least overvalued

In his most recent analysis on his YouTube channel, Damodaran delved into the valuation of the Magnificent Seven.

He revealed that Tesla (NASDAQ:TSLA) and Meta (NASDAQ:META) appear to be the least overvalued among these market giants.

In short, Damodaran’s valuation analysis indicates that Tesla and Meta are near their fair value. Tesla is showing a slight overvaluation and Meta is almost fairly valued, he concludes. This assessment is based on a meticulous examination of their business models, profitability, and market positions.

Tesla’s innovative approach to electric vehicles and renewable energy solutions, combined with Meta’s dominance in social media and digital advertising, underscores their unique value propositions, argues Damodaran.

The two most overvalued

Damodaran’s meticulous examination reveals that among the Magnificent Seven, Nvidia and Microsoft are the most overvalued.

According to his calculation, Nvidia is overvalued by a staggering 56%. This high level of overvaluation for Nvidia is partly due to heightened expectations around the AI market and Nvidia’s leading role in it.

In second place, Microsoft is overvalued by 14%, according to Damodaran’s analysis. It is also benefiting from euphoric optimism over its OpenAI division and the implications for future growth.

Apple, Amazon, and Alphabet are closer to their intrinsic values, suggesting a more moderate discrepancy between their market prices and Damodaran’s calculated fair values.

Magnificent Seven stocksOvervaluation
Nvidia56%
Microsoft14%
AppleSlightly overvalued, specific % not provided
AmazonSlightly overvalued, specific % not provided
AlphabetSlightly overvalued, specific % not provided
TeslaSecond-least overvalued, specific % not provided
MetaClosest to fair value, specific % not provided
Source: Professor Aswath Damodaran’s YouTube channel, video posted on 9 February 2024

Am I buying?

Investors looking for opportunities within the Magnificent Seven may find Tesla and Meta to be at relatively attractive entry points.

However, as Damodaran cautions, valuation is not the sole criterion for investment decisions. Market conditions, investor expectations, and broader economic factors play critical roles in shaping investment outcomes.

Personally, I don’t own any of the Magnificent Seven stocks in my portfolio. Meta and Tesla may be the least overvalued according to the professor. Still, I’d rather hunt for truly undervalued gems in less crowded markets – for example, on the FTSE 100.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Mark Tovey has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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