The stock market has been riding the wave of the “Magnificent Seven” since the start of 2023, but are these titans of industry now too dear for investors to acquire? While these companies have enjoyed a meteoric rise, signs of vulnerability are beginning to surface. Some appear over-extended and command staggering valuations, despite robust business performance. However, is every member of the “Magnificent Seven” overpriced?
The Evolution of the Magnificent Seven in 2023 and 2024
Comprising Microsoft, Apple, Nvidia, Alphabet (Google), Amazon, Meta Platforms, and Tesla, the “Magnificent Seven” delivered exceptional returns in 2023, with even the lowest-performing stock, Apple, yielding almost 50%. Yet, the narrative shifted in 2024. Performance across the board has been erratic, casting doubt on the invincibility of these giants.
One key factor affecting market perception is valuation. Investors seem hesitant to pay the premium required for shares in this esteemed group. Due to being predominantly growth-oriented, I opted to evaluate their worth based on revenue growth juxtaposed with their forward price-to-earnings (P/E) ratio. This combined lens offers a broader view, highlighting a company’s ability to sustain growth amidst cost-saving endeavors.
Tesla endured a tough year, witnessing a significant value erosion. Factors contributing to this decline include sluggish electric vehicle (EV) sales growth and diminishing margins owing to intensified competition. The once lofty premium on Tesla shares has plummeted, and the stock is now valued at 55 times forward earnings.
In a similar vein, Apple has faced prolonged challenges, with quarterly revenue oscillating between contraction and a meager 2% expansion year-on-year throughout 2023. Such lackluster growth, especially for a company positioned as a growth stock, has resulted in diminishing investor appetite. Even at a current 26 times forward earnings, Apple’s valuation appears steep relative to its growth trajectory.
Albeit Tesla and Apple’s struggles, the remaining five members of the “Magnificent Seven” exhibit diverse trajectories in 2024, implying that not all are overpriced.
Assessing the Remaining Five Market Leaders
Alphabet and Meta Platforms emerge as frontrunners for undervalued status. Alphabet, despite facing PR challenges related to its generative AI model, maintains a robust ad business. Trading at 22 times forward earnings, it stands as the most reasonably priced stock among the magnates.
Meta Platforms follows closely, priced at 25.5 times forward earnings. Leveraging its core advertising business across various social media platforms, Meta Platforms is aptly positioned to ride the ongoing ad recovery wave, signaling sustained growth prospects.
Nvidia, often perceived as pricey, continues its meteoric ascent in the AI realm with best-in-class GPUs. Though trading at 38 times forward earnings, Nvidia’s pivotal role in the AI revolution justifies its valuation.
Amazon’s valuation remains intricate due to ongoing profit optimization initiatives, skewing its forward earnings multiple. Trading at 42 times earnings, Amazon holds the second-most expensive valuation within the group. Yet, with increasing gross profit margins, it’s a matter of time before profitability surges, rendering its valuation more appealing.
Microsoft, although the largest company by market capitalization, commands a lofty 37 times forward earnings valuation. Despite exhibiting significant growth fueled by innovative AI products and expanded cloud computing market share, Microsoft’s premium valuation, akin to Nvidia’s, seems steep for a company growing at 18% while seemingly optimized for profits.
Given these insights, how do these industry juggernauts rank from least to most expensive?
Ranking the Magnificent Seven by Valuation
Ranking these companies solely on their forward price-to-earnings (P/E) multiples understates the full picture. Whereas Apple grapples with growth challenges, Nvidia triples its revenue, signaling diverse growth trajectories and future potential.
Here is my ranking of the “Magnificent Seven” from the most affordably priced to the most expensive:
- Alphabet
- Meta Platforms
- Amazon
- Nvidia
- Tesla
- Microsoft
- Apple
Classifying Alphabet and Meta Platforms as the most reasonably valued was an evident choice, while Amazon and Nvidia exhibit promising growth avenues, potentially justifying their seemingly steep valuations. Tesla’s outlook remains enigmatic, with its valuation potentially a bargain amidst rising EV demand.
Insight into Tech Giants and Investment Opportunities
Amidst the realm of tech giants, where Microsoft and Apple reign supreme, a discussion ensues around the battleground of growth prospects. Priced dearly for their potential advancements, Microsoft and Apple’s stock valuations have soared, with Apple taking the crown for being the languid player in the growth game.
Investors’ Call to Action
While this may be a pecking order in the eyes of one investor, the final decision rests with investors themselves. The question lingers – are these tech behemoths trading at levels considered “bargain” enough for a buy?
Is Nvidia Worth a $1,000 Investment Now?
Before diving into Nvidia’s stock, a prudent approach beckons reflection on certain factors. Unveiling a different perspective, the analyst team at Motley Fool Stock Advisor unveils their discoveries on the matter:
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