04 Jul 2024

US tech stocks | The ‘Magnificent 7’

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the group coined the Magnificent 7. The performance of this group of large, tech oriented US stocks has been a major theme for markets in recent years.

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By Close Brothers Asset Management

What makes them so significant?

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla comprise the group coined the Magnificent 7. The performance of this group of large, tech oriented US stocks has been a major theme for markets in recent years.

As part of our recent Investor Insights report, our senior investment specialist, James Tulloch met with Valeria Moore, deputy head of Equity Research to explore the significance of this group of stocks on markets, and what exactly makes them so magnificent.

James Tulloch (JT): What do these companies have in common and why have they been grouped together by market commentators as the Magnificent 7?

Valeria Moore (VM): The stocks have been grouped due to their large market capitalisation, strong market positions and global reach within their respective industries. Their dominance is evident in various ways, and individually each has had a significant impact on technology, business and consumer markets globally. The companies all have massive user bases through social media platforms, operating systems, online market places and mobile devices, which materially translates to a large global reach. These companies continue to be leaders in innovation. The fast pace of this innovation is arguably the most fascinating and transformative attribute the Magnificent 7 have in common.

JT: So far this year there has been quite a large dispersion in share price amongst these stocks, with Nvidia’s share price continuing to rise quite substantially and Tesla’s seeing a notable decline. How can we discern between the companies in this group, are they all as magnificent as each other?

VM: All seven companies are certainly unique and they differ in various areas, such as by end market and growth drivers. For example, Tesla is driven by trends in electric vehicles (EV) and the company has benefited from EV adoption quadrupling over the last three years. However, there are various short term challenges for Tesla, including pricing trends as mass market penetration increases.

On the other hand, Nvidia is experiencing earnings’ momentum due to strong demand of its graphic processing units (GPU) used by clients such Alphabet and Meta. This is a unique, advanced and complex solution is based on hardware, software and connectivity that supports generative artificial intelligence (Gen AI) as large language models (LLM) are adopted, trained and later modified by Alphabet, Meta and other clients, including enterprises and governments.

JT: On the theme of volatility, is the performance of the Magnificent 7 in any way reminiscent of the dot.com bubble?

VM: The performance can be seen as reminiscent, but is a completely different market environment today than the dot.com era of the late 90s, early 2000s, when valuations reached the top of the ‘bubble’ and then declined causing significant investor losses. At that time, most internet companies were at an immature stage of development, some were not profitable and the structure of the market was very immature and highly competitive. Valuations were then very high, and at times based on arbitrary parameters such as clicks, which we know now are not viable. So although at present we have high but reasonable valuations, it is within a more mature market structure.

JT: Should we be concerned about history repeating?

VM: In contrast to the companies involved when the dot.com bubble burst, the Magnificent 7 companies are more mature, with a strong competitive advantage that has been built over decades. They have solid market positions and financial strength, so over all they are much more robust than those in the dot.com era.

JT: These stocks have seen their share prices rise very significantly over a prolonged period. How do you go about discovering whether or not that can continue?

VM: As an equity analyst, I am guided by different market variables which can affect the companies and I keep a close eye performance on a daily basis. I consider valuations based on numerous metrics, and also earnings expectations for the next 12 months or more in order to support earnings’ visibility. I meet with management and consider the balance between supply and demand and I also look at clients’ demand as capital expenditure intentions that back order decisions. Ultimately, semiconductor stocks can be volatile and macro related pauses in orders’ demand can take place unexpectedly, so it is imperative to watch these stocks closely.

JT: One stock which isn’t as familiar a household name as the other companies is Nvidia. Why has this the company become so significant?

VM: We are in the early stages of a new era, seeing the initial experimentation phase of artificial intelligence and Nvidia is significant because it excels with new product launches in this area. The group offers a full and unique architecture, giving it a strong competitive advantage. At this stage, market penetration is very low still and likely to expand which is advantageous for the group. Artificial intelligence is a revolution which can bring productivity and other advantages, critical for the likes of Meta and Google and also for enterprises and governments. Nvidia is at the forefront of this innovation and provided generative artificial intelligence is used ethically, I see this as a medium term growth driver.

JT: Are there any stocks within the Magnificent 7 which you are paying particularly close attention to?

VM: I am watching Microsoft with particular interest due to its exposure to the cloud, and the fact that the group has been able to innovate and adopt generative artificial intelligent based solutions to further support cloud expansion. These solutions support enterprise clients as they continue to increase their efficiency and productivity.

To read our latest Investor Insights report in its entirety, visit our website.

 

Get in contact:

Ben Staniforth, managing director

Email: Ben.Staniforth@closebrothersam.com

Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgement as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.