With the so-called ‘Magnificent Seven’ stocks garnering headlines of late, many investors may be wondering if their potential has peaked or if there are still returns to be made.
The Good
Meta – A recent outstanding earnings report and possibly OTT stock price reaction, but that’s passive investing for you: the higher it goes, the more they have to buy, and they do it straight away.
Meta is going to win the artificial intelligence (AI) war, thanks to the right call on Open Source technology and AI is more useful to the firm than any other on the planet by providing better targeted advertising.
That’s what customers are seeing and so Meta is reaping rewards. It also still has WhatsApp to come. If something comes along to challenge the iPhone as ‘the’ device of choice for billions then more power would shift to Meta and it could be the world’s biggest company in five years.
Amazon – The company has been running its divisions more efficiently, with a recovery in Cloud, better margins in logistics, curtailment of excessive losses ($10bn on Alexa), and a sizeable advertising revenue opportunity being introduced to Prime.
Amazon is a much more attractive prospect now than it has been for a long time and we could even see it pull off a repeat of what Netflix has achieved over the past 15 months.
Nvidia – Think of these guys as the arms dealer to a very big fight with all players having very deep pockets. The stock still works higher over time, I think, as analyst expectations are still too low, underestimating software contribution and expecting the rate of growth to slow after this quarter.
This looks pretty unlikely given what its biggest customers said about planned Capex. The concerns to monitor will surround potential introductions of in-house alternatives by those same companies and of course, you can’t expect it to go up in a straight line.
The Bad
Microsoft – It is controversial to be down on this company, but it has a lot riding on Copilot with the grapevine offering murmurings of potential disappointment in the speed at which this is monetized and adopted.
This quarter we also saw a wrinkle on the Capex number, with $11bn deferred which cast the numbers in a more flattering light than perhaps they deserve. Microsoft is likely to see Google fight back or die trying – potentially disrupting pricing, which benefits neither. Lastly, the company is heavily owned by institutions, leaving few new buyers out there to drive demand.
Alphabet – It is clearly struggling in both AI and digital advertising. By Google’s own admission, LLMs have no moat and it is lagging Microsoft. This means a massive jump in Capex on that front, whilst it is simultaneously losing market share in digital advertising to Meta, Netflix, Amazon et cetera.
Google’s saving grace for many lies in the fact that its valuation has been taken down – but I don’t think you ever want to buy tech stocks based on them being ‘cheap’; there is a usually a reason for the yellow stickers to come out.
The Ugly
Apple – The brand halo, its index weighting and its monopoly is all that keeps Apple at the wrong price. It has underperformed the market by about 9% this year already and will continue to do so having missed China sales targets, service revenue targets (Apple’s highest margin driver), and gave next quarter guidance below previous forecasts.
Ability to boost shares via stock buybacks may slow down soon as debt needs to be refinanced, while the new headset is getting poor reviews, loads of returns and isn’t big enough to move the needle anyway.
Paying 50% over market value for less than market growth is madness – I would only look at Apple once it goes below $150 – even Warren Buffett sold some stock last quarter.
Tesla – I think the game is up here, and by that I mean in terms of its valuation, so whatever it does now Tesla is running up a downward escalator. Once Tesla started producing more cars than it could sell, the excess inventory put pressure on prices to shift product.
The knock-on effect is that the value of used vehicles also goes down, destroying an important aspect of the overall brand value. Cybertruck has been a waste of money and it has lost two important market leads – in China to BVD, and Germany to Volkswagen.
Electric vehicle subsidies are looking shaky and Germany has too much invested in its own cars to promote cheap Chinese imports, which hurts Tesla too. New product innovations are taking too long and how many people are so bad at parking or changing lanes they are prepared to pay $6,000 for the car to do it? It’s a firm ‘Sell’ from me.
Julian Wheeler is a partner at Shard Capital. The views expressed above should not be taken as investment advice.