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Here's the Only "Magnificent Seven" Stock That's Not Overpriced, According to the "Dean of Valuation"

Motley Fool - Mon Feb 26, 4:48AM CST

When stocks are categorized into a group and given a catchy nickname, you might say that they've arrived. In the 1960s and early 1970s, the "Nifty 50" were wildly popular. In the 1990s, "The Four Horsemen" grabbed investors' attention. A few years ago, the FAANG stocks were all the rage.

Today, we have the "Magnificent Seven." With such a superlative adjective in the nickname, you'd expect that these stocks have been huge winners -- and you'd be right. However, winning can come at a cost. That's literally true with these stocks: Most of them now have premium valuations.

Don't just take my word for it. New York University finance professor Aswath Damodaran is widely known as the "Dean of Valuation" because of his expertise in valuing stocks. Damodaran recently posted on his blog, "On every pricing metric, the Mag Seven stocks trade at a premium over the rest of the stocks in the S&P 500."

But based on his own analysis, Damodaran doesn't think all of these seven stocks have excessive valuations. There's one "Magnificent Seven" stock that's not overpriced, according to the "Dean of Valuation."

Crossing two stocks off the list

It's not Nvidia(NASDAQ: NVDA).

Writing in early February, Damodaran ranked the giant chipmaker as the most expensive "Magnificent Seven" stock of all. At the time, he believed that Nvidia was trading nearly 56% above its fair valuation. Damodaran even posted on X, the social media platform formerly known as Twitter, that Nvidia "is a bridge too far for me." He added that he planned to reduce his position in the stock by half.

Keep in mind that this was before Nvidia announced its blowout fourth-quarter results. The stock is now nearly 19% higher than it was when Damodaran said that it was way too expensive.

The NYU professor and author also wrote that Microsoft(NASDAQ: MSFT) was clearly overvalued. In his blog several weeks ago, Damodaran revealed that the tech stock was trading nearly 14% above its fair valuation. Microsoft's share price has risen slightly since then.

Damodaran did acknowledge, though, that he might be too pessimistic about Nvidia's and Microsoft's growth prospects. He stated, "I have built in substantial value from AI in my valuation of Nvidia, and given Microsoft significantly higher growth because of it, but it is plausible that I have not done enough."

Not too far off from fair valuations

Several "Magnificent Seven" stocks weren't too far off from their fair valuations, in Damodaran's view. He wrote that Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL), Apple, and Amazon were "within striking distance of value."

At the time he wrote those words, all three of these stocks traded at less than 9% above the fair values that Damodaran calculated. Alphabet and Apple have since fallen slightly, while Amazon has risen a little.

Meta Platforms looked "close to fairly valued," in Damodaran's opinion. The stock was trading at nearly 2.5% over its fair valuation based on his analysis. However, Meta's share price has jumped roughly 8% since Damodaran posted his blog.

The cheapest "Magnificent Seven" stock of all?

Damodaran determined that Tesla(NASDAQ: TSLA) was the cheapest "Magnificent Seven" stock of all. He even revealed that he had bought shares of Tesla in the week before his blog was published online.

Ranking Tesla as the most attractively valued "Magnificent Seven" stock might be surprising. The electric vehicle maker's forward earnings multiple currently tops 63x. That doesn't scream inexpensive.

However, Damodaran factors expected growth into his valuation model. He projected that Tesla will be able to increase its revenue by a compound annual growth rate of 31.1% over the next five years. When he crunched the numbers, the stock was only 0.72% above its fair value. After rising some in recent weeks, Tesla is now a little 6% over Damodaran's calculated fair value.

Because of the price changes for the seven stocks, Alphabet is now closer to Damodaran's fair value than any other "Magnificent Seven" stock. Importantly, the NYU professor didn't assume lofty growth for Alphabet, plugging a revenue CAGR over the next five years of only 8% into his model. This relatively low growth estimate makes his calculations less susceptible to being overly optimistic.

In my opinion, Alphabet deserves the mantle as the cheapest of the "Magnificent Seven" for now. I suspect that the "Dean of Valuation" might agree.

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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. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. 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.

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