Should Netflix Replace Tesla in the "Magnificent Seven"?

Neil Patel, The Motley Fool

Sun, Apr 20, 2025, 3:00 AM 4 min read

Pumping the brakes

Tesla became a favorite among the investment community because of its popular EV models that spurred a change in the auto industry. The company's revenue jumped almost 3,000% between 2014 and 2024. Its well-designed cars equipped with tech-forward features were a hit among consumers.

To be clear, though, the company is facing challenges. Competition is now catching up, with Tesla no longer the only game in town. Domestic and international rivals give consumers more options. As a result, Tesla doesn't have the pricing power it once commanded. In fact, it has had to cut prices numerous times just to support volume and try to spur demand.

In addition, CEO Elon Musk has become a polarizing political figure in Europe (where he endorsed the far-right AfD party in Germany's elections) and the U.S. (where he sunk $290 million into President Donald Trump's election and is heading up the Department of Government Efficiency, which is laying off thousands of federal workers and cutting services). The controversy has led to protests and vandalism at Tesla facilities amid a backlash against Musk and the company.

What's more, Tesla is revealing just how sensitive it is to macro forces. Higher interest rates in particular might be pressuring sales. In a first, Tesla delivered fewer vehicles in 2024 than in the year before. The company is starting to resemble a traditional cyclical auto manufacturer more than a technology enterprise.

Pressing fast-forward

While Tesla struggles, Netflix's business is thriving these days. The streaming entertainment powerhouse currently has 302 million subscribers, up 15.9% year over year and 36% in the last three years. Boosting the expansion has been successful efforts at cracking down on password sharing and launching a cheaper, ad-based tier to draw in price-sensitive consumers. Netflix has also made inroads into live entertainment and sports.

Even though this is a scaled operator, there is still growth potential. "We're less than 50% penetrated into connected households," CFO Spence Neumann said on the latest earnings call. Five or 10 years from now, the membership total is poised to be much higher.

Netflix's operating margin is expected to increase from an already stellar 27% last year to 29% in 2025. This continues a trend of expanding profitability, driven by significant economies of scale. Netflix can spend massive amounts on content that it's more than able to offset by its huge revenue base ($39 billion in 2024).

The company's success is remarkable, given the challenges competitors are facing. Perhaps its most formidable foe, Walt Disney, just recently started hitting profitability within its streaming segment. This demonstrates just how much of a lead Netflix has in the industry.

Time to buy Netflix?

Netflix can't officially replace Tesla in the group of seven, as this term clearly means a specific set of businesses. However, the streaming company's impressive performance makes me think it should take Tesla's spot. With a market cap of $392 billion, Netflix would be the smallest in the group by far.

Do the positive factors mean you should buy Netflix right now? As of this writing, shares trade at a price-to-earnings ratio of 46. This definitely isn't cheap, but it's much lower than Tesla's valuation of 123 times.

Netflix's fundamentals are in substantially better shape than the EV leader. And the market is offering its shares at a better price point. Of these two stocks, the streamer is the better one to buy.

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Neil Patel has positions in Walt Disney. The Motley Fool has positions in and recommends Netflix, Tesla, and Walt Disney. The Motley Fool has a disclosure policy.

Should Netflix Replace Tesla in the "Magnificent Seven"? was originally published by The Motley Fool

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