Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
In 2023, the ‘Magnificent 7’ - a term used to describe seven technology companies with some of the largest market capitalisations in the world - rose between a whopping 50% and 240%.1
The Magnificent 7 throws up some familiar names, including Microsoft, Apple, Google-owner Alphabet, Amazon, Nvidia, Facebook-owner Meta and Tesla.
Unsurprisingly, investors can’t contain their excitement about the trending Magnificent 7. Nvidia for example is producing uber fast chips that can power artificial intelligence.
Growth and income are also on offer for investors. Last year, the group collectively accounted for over 60% of the S&P 500’s total return. Meanwhile, Meta promised its first ever dividend to shareholders.
Although the Magnificent 7 have a golden allure, investors should be cautious about herd mentality.
While the mega corps’ resilience is hard to ignore, particularly in this ‘higher for longer’ interest rate environment, they aren’t always equipped to weather the storm. Firstly, unexpected events can happen. Take Apple’s recent patent issue with its Apple watch or Tesla’s recent share price fall after Elon Musk warned of a 'slowdown'.
Secondly, given the group also dominate the global equity market, regulators may also be a risk for the Magnificent 7.
According to the Financial Times, “the danger, though, is that just one scandal or swipe of a regulator’s pen could hit one stock and inflict pain on investors worldwide.”2
Here’s the story behind each of the Magnificent 7 stocks in order of their market capitalisation and recent earnings reports:
Read on or jump to the relevant company below.
1. Microsoft
Last month, US tech firm, Microsoft - renowned for its iconic Windows operating software became the world’s largest company by market value, narrowly beating its rival, iPhone maker, Apple.3
As of 7 February 2024, Microsoft’s market cap sits at a very comfortable $3 trillion.
According to Microsoft’s latest earning report on 30 January 2024, total revenue for the year hit $62 billion, an increase of 18% year-on-year.
The top three drivers of this included a boost in its server products and cloud services revenue which rose by 20% to $25.9 billion. While productivity and business processes saw an increase of 13%, to $19.2 billion and personal computing increased by 19%, to $16.9 billion.
But it’s Microsoft’s love affair with artificial intelligence (AI) that has got investors excited. The firm is the biggest backer of OpenAI - the company behind the revolutionary AI powered chatbot, ChatGPT.
These solid earnings also delivered a juicy income for investors. At the end of 2023, Microsoft returned $8.4bn to its shareholders.
It’s clear that investors are placing high expectations on Microsoft because despite a solid earnings report, investors were expecting the company to do even better. Following Microsoft’s report, the company’s share price fell.4
2. Apple
Apple is the second player in the Magnificent 7. In January, Apple was the top boy in the global market cap ranking, but Microsoft quickly swiped this title.
But the iPhone creator is not too far behind. As of 7 February, Apple has a $2.9trn market cap.
So, why the dip? Well, Apple has had its fair share of challenges recently. As mentioned above, a patent infringement case prevented Apple from selling its latest Apple Watch models - the Series 9 and Ultra 2.
Last October, an import ban was implemented by the US International Trade Commission which ruled that Apple infringed on a patent for a blood-oxygen sensor by Masimo - a medical device maker.5 As a result, Apple was forced to disable the feature on its latest Apple Watches, causing a delay in its product launch.
This month, another case regarding Apple Watch’s heart rate feature was thrown out of court. AliveCor, an ECG hardware and software firm, said that Apple was using “tactics in the heart rate analysis market that have injured competition, reduced consumer choice, and potentially damaged public health.”6
But the judge didn’t agree with the allegations. They said that it was not anticompetitive, nor did it warrant the case going to trial.
The two cases mentioned above signal how wildly competitive the biotechnology sphere is.
But investors aren’t worried. Apple’s products are diversified. Apple’s recent earnings report were promising. Its quarterly revenue was $119.6 billion, up 2% year-on-year. The company also returned a whopping $27 billion to shareholders, more than triple Microsoft’s dividend.
Tim Cook, Apple’s CEO said this growth for the December quarter was fuelled by iPhone sales and an all-time revenue record in services.
However, there were slowing sales in China - Apple’s third largest market but there was still strong revenue from America and Europe.
3. Alphabet
Google-owner Alphabet is the third player in the Magnificent 7. Its recent earnings were slightly disappointing after the company saw a drop in its advertising revenue.
According to Morningstar analysis, continuing weakness in Google’s advertising technology business, or Google network placed pressure on advertising growth.
“We think that Google’s owned, and operated properties remain the top priority for advertisers. Advertisers will likely use non-Google ad-tech platforms when they purchase on non-Google properties. This has been a trend for more than 10 years, during which network revenue has declined to 13% of total advertising revenue from nearly 23%.”7
Despite this weakness in advertising growth, Alphabet reported its fastest quarter for revenue growth since early 2022. The company ended 2023 with a strong fourth quarter, raking in $86 billion, up 13% year-on-year.
Sundar Pichai, CEO, said that there was ongoing strength in Google Search - with growth coming from YouTube and Cloud.
“Each of these is already benefitting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.” Said Sundar.
The ‘Gemini era’ Sundar mentions is Google’s new artificial intelligence model - Google DeepMind, which can ‘reason’ across text, images, video, audio, and code. According to its website, Gemini can “outperform human experts on various benchmarks.”
Artificial intelligence is an interesting sphere which investors are keeping a close eye on. The key question is - can Alphabet incorporate artificial intelligence into its business model as well as the kingpin - Microsoft? Only time will tell.
4. Amazon
Amazon is the fourth largest company in the Magnificent 7. As of 7 February 2024, the online retailer’s market cap was $1.76trn.
The company’s fourth quarter results were sturdy, as sales increased by 14% to $170bn in the fourth quarter, compared with $149.2 in Q4 2022. Total sales increased by 12% to $574.8bn in 2023.
Andy Jassy, Amazon CEO, said the firm was “most pleased with its invention and customer experience improvements.”
That includes a regionalisation of its US fulfilment network, faster delivery speeds for Prime members and Amazon Web Services’ incorporation of generative AI capabilities like Bedrock, Q and Trainium.
Given that Amazon may be seen as a consumer staple now, the company thrived during Black Friday and Cyber Monday, as customers purchased over 1 billion items.
The retailer is also exploring other business opportunities. Recently, Amazon entered a strategic partnership with Hyundai that offers access to Amazon’s Alexa. In the US, Prime members also have access to health care from One Medical.
Amazon’s attempt to diversify its business model even further may be an appealing long-term strategy for investors.
5. Nvidia
Nvidia is the fifth largest stock in the Magnificent 7'. The US chipmaker has been exciting investors for many months now. That’s because it’s the only Mag7 stock that is ‘pure’ artificial intelligence, as the hardware it produces is a key component in training AI models.
As of 7 February 2024, Nvidia had a market cap of $1.7trn, outpacing Meta and Tesla.
Although the company is yet to report its earnings (they’re due at the end of February) investors remain confident in Nvidia. In 2023 alone, Nvidia climbed up by a whopping 240%.
But all that glitters is not gold. In 2022, the Biden Administration placed an export ban on Nvidia chips to China. That could have startled investors, but Nvidia prevailed. The chipmaker simply worked around the restrictions - as a result, it redesigned some of its most powerful products - the A100 and H100 to ensure they’re compliant.
Given that Nvidia derives 20% of its revenue in China, it’s no wonder the company prioritised a redesign.
But despite this agility in redesigning its chips, the US remains strict on chip exports to China.
Last December, Gina Raimondo, US secretary of commerce warned tech firms, saying, “If you redesign a chip…that enables [China] to do AI, I’m going to control it the very next day.”
This particularly impacts Nvidia, as producing AI hardware is the heart of its operations. Other ‘magnificent 7’ stocks don’t have this issue.
Another wider concern around Nvidia is that the AI chip frenzy may not last forever.
According to the FT, “competition for generative AI hardware is catching up, end-user deployments don’t need much power once the database is built, there’s a shakeout due soon, and Nvidia’s estimated 98% market share of data-centre GPUs probably won’t last.”8
The key question for investors is when will this competition for generative AI hardware catch up?
All eyes will be on Nvidia’s earnings report which is out on 21 February.
6. Meta
Meta, owner of Facebook, WhatsApp and Instagram is the sixth largest company in the Magnificent 7. As of 7 February 2024, the firm had a market cap of $1.19trn.
Earlier this month, Meta’s shares rose a whopping 20% and its total value increased by a staggering $197bn. That’s because Meta announced its first ever 50c-per-share dividend to investors. It also authorised a $50bn share buyback program.
My colleague, Graham Smith, wrote a great article about how big technology could become a new source of income.
Overall, Meta’s fourth quarter revenue was $40.1bn, up 25% year-on-year. This announcement shows how quickly technology stocks can rise. But critics say that the stock could be overvalued.
It was only last October that Meta warned that its revenues could be rocky, after macroeconomic uncertainty and lower advertising demand in response to geopolitical tensions.
Like other Magnificent 7 stocks. Meta is prioritising AI. Meta founder and CEO, Mark Zuckerburg said the firm has, “made a lot of progress of our vision for advancing AI and the metaverse.”
And AI will continue to be a focus for Meta. In a previous quarter’s earnings call, Zuckerburg said AI will be its biggest investment area in 2024. To support this vision, the firm said it would be acquiring $9bn in Nvidia chips.
Generative AI has also boosted the effectiveness of its ads which took a hit in 2022 when Apple made changes to its privacy policy.9 As a result, Meta’s advertising revenue increased by 16% to $132bn.
7. Tesla
Tesla is the seventh company in the Magnificent 7. As of 7 February 2024, Tesla’s market cap was $597bn.
But its recent earnings report didn’t meet expectations. Tesla’s revenue was up 3% to $25.2bn, marking its slowest pace of growth in over three years.10
In a letter to shareholders, Tesla said, “in 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.”
The drop in revenue can be attributed to reduced demand for electric cars, increased competition and high interest rates.
Is the hey day of Tesla over? Well, Elon said that is dependent on the direction of interest rates. He said, “if interest rates come down quickly, margins will be good and if they don’t, they won’t be that good.
All these factors shaved off value on Tesla’s shares. This year, they fell by 26.5%.
Unlike other Magnificent 7 stocks, like Meta and Alphabet, Tesla’s products are not nearly as diversified as others in the group. That makes it far more vulnerable compared to its other tech competitors.
Tesla is also more vulnerable to interest rates. And while Microsoft, Nvidia, Alphabet, Amazon, Meta and Apple are competing in the AI space, car manufacturing is far more niche.
All in all, the Magnificent 7 is bringing some promising opportunities for investors. Simply look at The Magnificent Seven film where four of the characters end up dead. The same could be said of the 'magnificent 7' technology stocks. But who the winners and losers will be in decades to come is impossible to tell. Investors must remember, herd mentality isn’t always a good thing.
Find out how to invest in Magnificent 7 stocks.
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Sources:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Direct shareholdings should generally form part of a well-diversified portfolio of other investmnets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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