When stocks are bestowed with a moniker like the “Magnificent Seven,” it’s a sure sign of their prominence in the market landscape. Think back to the 1960s and “Nifty 50,” or the ’90s with “The Four Horsemen.” Fast forward to the recent past, and the FAANG stocks took center stage.
Currently, we find ourselves captivated by the “Magnificent Seven.” The superlative tag hints at their phenomenal performance, and rightly so. But as the saying goes, all that glitters is not gold. And indeed, the sheen of these stocks comes with a hefty price tag. Most of them now boast premium valuations.
Bulls and Bears in the Valuation Arena
New York University’s finance guru, Aswath Damodaran, known as the “Dean of Valuation,” recently made waves by declaring that the “Magnificent Seven” stocks are trading at a premium compared to their S&P 500 peers. However, amidst the sea of high valuations, there emerges one gem that shines bright without the weight of exorbitance.
Stumbling over the Priciest
Unfortunately, the accolade for the most expensive “Magnificent Seven” stock was not one to cherish. Damodaran pinpointed Nvidia (NASDAQ: NVDA) as the overpriced frontrunner, trading nearly 56% above its fair value earlier this year. The chip giant was a bridge too far for Damodaran, prompting him to trim his Nvidia holdings despite the subsequent surge following its impressive fourth-quarter results.
Price and Value: Walking a Thin Line
On the other hand, Damodaran flagged Microsoft (NASDAQ: MSFT) as clearly overvalued, floating approximately 14% above its intrinsic worth. While acknowledging potential undervaluation of Nvidia and Microsoft, he remained cautious about their growth prospects, hinting at underestimation on his part.
Close, Closer, Closest: The Valuation Spectrum
Amidst this meticulous evaluation, Damodaran found Alphabet (NASDAQ: GOOGL) alongside Apple and Amazon, hovering “within striking distance of value.” Similarly, Meta Platforms (formerly Facebook) appeared to be sitting at a fair valuation, reflecting stability in Damodaran’s valuation metrics.
In the Realm of Relative Value
Surprisingly, Damodaran crowned Tesla (NASDAQ: TSLA) as the most attractively valued among the elite “Magnificent Seven.” Projections of robust growth placed Tesla marginally above its fair value, offering investors a glimmer of hope.
As the market continues its dance of valuations, Alphabet emerges as a potential bargain within this exclusive club, underpinned by conservative growth estimates. With a nod to the “Dean of Valuation,” we can’t help but agree that Alphabet stands tall in the midst of price turbulence.
When it comes to prudent investment decisions in the current market climate, the road less traveled by high valuations could indeed make all the difference.
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