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

The S&P 500 (SNPINDEX: ^GSPC) 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 (NASDAQ: TSLA) and Microsoft (NASDAQ: MSFT).

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.