Despite soaring interest in artificial intelligence (AI), “Magnificent Seven” stocks Tesla (NASDAQ: TSLA) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) underperformed the S&P 500 by a wide margin during the past year. Specifically, Tesla shares fell 9%, and Alphabet shares advanced 18%, while the S&P 500 soared 36%.

Looking ahead, Wall Street expects Tesla to slide lower over the next year, but analysts think Alphabet will produce sizable gains. Here are the specifics from The Wall Street Journal:

• Among the 58 analysts who follow Tesla, the average 12-month price target is $216 per share. That forecast implies 2% downside from its current share price of $221.

• Among the 68 analysts who follow Alphabet, the average 12-month price target is $203 per share. That forecast implies 24% upside from its current share price of $163.

Investors should never rely on price targets, but they are a good place to begin researching a company. Here are the important details on Tesla and Alphabet.

Tesla: 2% implied downside

Tesla has stumbled due to macroeconomic challenges. High interest rates have exacerbated inflationary pressure on consumer wallets, suppressing demand for electric cars. Tesla has cut prices several times to boost demand, but its leading market share fell 3.1 percentage points year to date through August, and the price cuts have weighed heavily on its financial results.

Tesla narrowly topped the consensus sales estimate in the second quarter, but its earnings fell short for the fourth consecutive time. Specifically, while revenue increased 2% to $25.5 billion, operating expenses soared 39%, and non-GAAP (generally accepted accounting principles) net income declined 43% to $0.52 per diluted share. However, there were a few silver linings, including increased production of its 4680 battery cell, something management called a “major cost reduction milestone.”

Tesla recently hosted a robotaxi event where it unveiled the Cybercab. The self-driving vehicle lacking a steering wheel and pedals will enter production in 2027 and cost less than $30,000. CEO Elon Musk also said Tesla would launch an unsupervised version of its full self-driving (FSD) software in California and Texas next year. But investors are justifiably skeptical, given that the company has overpromised in the past.

Looking ahead, Wall Street expects Tesla’s earnings to increase by 12% annually over the next three years. That estimate makes the current valuation of 62 times earnings look very expensive. However, Tesla could beat the consensus forecast if its FSD software can truly function without supervision by 2025. That could boost FSD subscription sales and allow a quick launch of robotaxi services.

Story continues

Personally, I think eager investors can buy a small position in the stock here, provided they know its long-term performance depends greatly on Tesla’s ability to transition toward high-margin artificial intelligence revenue (i.e., FSD software and robotaxi services) and away from capital-intensive automobile manufacturing. Having said that, it may be more prudent to wait for additional details concerning unsupervised FSD and the Cybercab.

Alphabet: 24% implied upside

Alphabet is the global leader in digital advertising, with an estimated market share of 27.4% in 2024, according to eMarketer. That dominance stems from its ability to source data and engage consumers with popular internet platforms like Google Search and YouTube. Alphabet has long used AI to inform its search engine and ad tech software, but it has recently added generative AI capabilities to further improve the user experience.

Alphabet also operates the third-largest public cloud in Google Cloud Platform. While its market share trails that of Amazon Web Services and Microsoft Azure by a wide margin, strength in AI infrastructure and large language models helped the company gain a percentage point of market share over the past year. “Google’s Gemini combines a world-class model with enterprise cloud services,” according to analysts at Forrester Research.

Alphabet reported solid financial results in the second quarter, beating estimates on the top and bottom lines. Revenue rose 14% to $84.7 billion due to strong momentum in the cloud computing unit and more modest growth in the advertising segment. Meanwhile, GAAP net income increased 31% to $1.89 per diluted share due to continued cost control efforts.

Beyond advertising and cloud computing, Alphabet also has a long-term opportunity with its autonomous driving subsidiary, Waymo. The company provides more than 100,000 rides weekly across Phoenix, San Francisco, and Los Angeles. It has partnered with Uber to bring autonomous ride-hailing services to Atlanta and Austin in 2025.

Analysts at Bank of America estimate Waymo’s revenue could reach $75 million this year, an inconsequential sum compared to Alphabet’s total revenue, but the autonomous driving unit should become increasingly significant in the future. The robotaxi market is projected to increase at 67% annually to reach $108 billion by 2031, according to Straits Research.

Looking ahead, Wall Street expects Alphabet’s earnings to increase by 17% annually over the next three years. That consensus estimate makes the current valuation of 23.4 times earnings look reasonable. Those figures give a price/earnings-to-growth ratio (PEG ratio) of 1.4, which matches the three-year average. Long-term investors should feel comfortable buying a small position in this stock today.

Should you invest $1,000 in Tesla right now?

Before you buy stock in Tesla, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Tesla wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $845,679!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 14, 2024

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, 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. Trevor Jennewine has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Microsoft, Tesla, and Uber Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Tesla Stock vs. Alphabet Stock: Wall Street Says Buy One and Sell the Other was originally published by The Motley Fool