Amazon…Alphabet…Apple…Meta Platforms…Microsoft…Nvidia…Tesla. These large-cap growth stocks—“The Magnificent Seven”—have been on a tear. They averaged an 87% return through the first nine months of 2023, versus 12% for the S&P 500 Index. Turbocharged by the potential of artificial intelligence (AI) to boost their business models, the Magnificent Seven’s total market capitalizations have increased by more than $4 trillion.
But can these behemoths still be lucrative in the coming years? They face plenty of land mines, including federal antitrust lawsuits, a possible recession and Wall Street’s sky-high expectations. We asked leading stock experts to analyze each company’s pros, cons and overall potential.
Great Buys
Long-term investors should consider buying shares in the following…
Alphabet (GOOG). Google’s parent, the Internet search firm attracts nearly one-third of online ad spending globally. Recent share price: $135.17.*
Pros: It beat Wall Street’s expectations across nearly all metrics. Revenues rose 7% year-over-year, helped by a strengthening environment for digital ads. Google Cloud, which provides data-storage and AI tools, soared 28% year-over-year and its operating margin continued to improve.
Cons: Alphabet faces questions about how it will adapt to technological changes while it is dealing with major antitrust trials happening this year—one with the US Justice Department…the other with the attorneys general of 38 states.
Outlook: The stock has risen 49% this year, but it’s still the most undervalued of the seven companies. The market doesn’t seem to be pricing in much benefit from AI even though Alphabet has as good a chance as anyone of being a leader in that area. Alphabet has spent more than $150 billion on R&D in the last five years, much of it on AI. Google search hasn’t lost any of its roughly 90% market share since ChatGPT was introduced. Investors also are treating the company’s Other Bets division, including Waymo, the autonomous driving tech firm, as a negative to value because of reported losses. But if you treat these as venture capital–type investments and adjust for the cash on the balance sheet and the Cloud value, the core business is selling for only a low double-digit multiple of earnings despite having above-market growth. Finally, we estimate that the Google ad tech network, which gets much of the legal and regulatory focus, accounts for only a single-digit percentage of Alphabet’s total value.
Robert F. Bierig is a partner at the investment management firm Harris Associates, Chicago, and portfolio manager of the Oakmark Fund (OAKMX) and Oakmark Select Fund (OAKLX). Oakmark.com
Fair Value
Long-term investors should consider maintaining current holdings and accumulating shares on pullbacks of these…
Amazon.com (AMZN) is the leading e-commerce retailer in the US. Recent share price: $129.46.
Pros: It trounced expectations in its most recent quarter, with revenues rising by nearly 11% year-over-year. It has cut 27,000 jobs since last November to reduce costs and focus on profitability.
Cons: Revenue growth at Amazon Web Services, the cloud-computing business, decelerated sharply in the first half of 2023 as customers worried about inflation and a possible recession, but those slowdowns may have bottomed out.
Outlook: Amazon.com stock has risen 51% this year despite belt-tightening by customers. Revenues at AWS, which controls one-third of the US cloud computing market, should bottom out soon, with healthier years ahead.
Meta Platforms (META). The parent company of Instagram and Facebook is the world’s largest online social network, with three billion monthly users. Recent share price: $306.82.
Pros: CEO Mark Zuckerberg dubbed 2023 “the year of efficiency,” cutting 10,000+ jobs. Revenue, mostly from Facebook and Instagram ads, jumped 11% year-over-year in its most recent quarter.
Cons: In 2023, Meta will sink an estimated $16 billion+ in money-losing projects involving the metaverse, an immersive, online-based virtual world.
Outlook: AI is boosting Meta’s digital-ad profit margins. AI-recommended content has led Facebook users to spend 7% more time on the platform this year, and Reels, the company’s TikTok-style short-video feature, is on track to generate more than $10 billion in annual ad revenues. Still, after a 150% leap in stock price so far this year, the good news is already largely priced into the share price.
Microsoft (MSFT). The business software giant is known for its Windows operating systems and Office productivity suite. Recent share price: $321.80.
Pros: Its investment in Open-AI, which launched ChatGPT in late 2022, was the high-profile AI story. The company is introducing a $30-a-month subscription for AI tools in its Microsoft 365 software suite. Copilot, a ChatGPT-fueled assistant, allows you to analyze data in Excel and design presentations in PowerPoint.
Cons: Microsoft’s revenue growth continued to slow overall, hurt by a poor environment for personal computers, which is likely to persist the rest of the year.
Outlook: Microsoft stock has risen 32% this year. Once the company works through near-term slowdowns, it will position itself to become the face of AI. This strategy’s centerpiece is the cloud-computing platform Azure, whose revenues grew 26% year-over-year in its most recent quarter.
Joseph Fath, CPA, is vice president at T. Rowe Price, Baltimore, and portfolio manager of the T. Rowe Price Growth Stock Fund (PRGFX). TRowePrice.com
Nvidia (NVDA). The semiconductor design company makes graphics processor units (GPUs) needed for AI software. Recent share price: $447.82.
Pros: In its most recent quarter, Nvidia had revenues of $13.5 billion, double from a year ago. It has a $14 billion pipeline of orders for semiconductor chips needed for autonomous electric vehicles (EVs).
Cons: Other powerful chip makers are already pivoting to compete for the AI market. AMD has announced its most-advanced GPU for AI will start shipping to some customers later this year.
Outlook: Nvidia’s stock jumped nearly 200% since the start of the year. It has had extraordinary revenue growth for a trillion-dollar company, and I expect that to continue for the next one to two years. Every major company is racing to buy Nvidia’s GPUs. Longer term, there are concerns over its lofty valuations since it is unclear how big the AI market will become, as well as whether growth will slow at some point due to excess capacity. Potential landmine: Some of Nvidia’s biggest customers will turn into major competitors. Amazon.com, Alphabet and Microsoft all are likely to start designing GPUs in the next decade.
Brian Colello, CPA, is director of technology equity research at Morningstar, Inc., Chicago. Morningstar.com
Overvalued
Long-term investors can maintain holdings, but shorter-term and aggressive investors may want to take some profits…
Apple (AAPL) is the creator of iconic products such as the iPhone and iPad. Recent share price: $173.75.
Pros: Ancillary services (iCloud, Apple Pay, Apple Music, Apple TV) have a billion subscribers, and their revenue rose 8% in a recent quarter versus a year ago.
Cons: Disappointing iPhone sales mean four quarters of revenue declines. The $3,500 Apple Vision Pro reality headset is running into production problems ahead of its 2024 launch.
Outlook: Despite a sales slump, investors drove up Apple’s stock price 32% so far this year in anticipation of the iPhone 15 launch. But the iPhone market is saturated, and Apple hasn’t produced a new transformative product recently. In the past, it has used share buybacks to grow earnings, but with valuations high, it’s difficult for buybacks to have an impact on share count.
Vitaliy Katsenelson, CFA, is CEO and CIO of Investment Management Associates, Greenville, Colorado, and author of Active Value Investing and The Little Book of Sideways Markets. IMAUSA.com
Tesla (TSLA). Run by Elon Musk, the EV manufacturer controls 65% of the US market. Recent share price: $251.60.
Pros: Tesla recently posted quarterly revenues 46% higher than last year. It plans to deliver 1.8 million vehicles in 2023, up from 1.3 million in 2022. Automakers such as Ford and GM agreed to modify their EVs so they can be recharged using Tesla’s network of supercharger stations.
Cons: To maintain sales growth, Tesla cut Model 3 and Y vehicle prices, shrinking profit margins. CFO Zach Kirkhorn, who managed production costs, resigned.
Outlook: The stock has surged 98% this year. Competitors will chip away at its market share, but its ability to produce cars at lower cost will allow it to maintain leadership. A forward price-to-earnings ratio of 75 makes the stock pricey. A lot rides on this year’s debut of the Tesla Cybertruck.
