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Some stocks in the Magnificent Seven have been less so during 2024, and certainly compared to last year. Is there room for improvement during 2025? At the end of the line, it makes less sense to lump them together from this point onward.
With New Highs, Is It Time To Be Bearish or Bullish?
As reported by the Financial Times on Tuesday, corporate insiders continue to sell their companies’ shares at an all-time high rate. At a glance, this may seem bearish, but there are some factors to consider. After the presidential elections, the S&P 500 () index reached a new all-time high on November 11, just above the 6,000-point threshold.Given that SPX hit new highs ~50 times throughout 2024, it stands to reason this would equally drive cash-in sentiment. Additionally, stock-based compensation (SBC) has significantly grown over the last two decades. Morgan Stanley an SBC to sales ratio increase from 19 to 33 percent between 2006 and 2022.(Click on image to enlarge)
Tech sector especially boarded the SBC bandwagon. Image credit: Morgan StanleyThis makes sense because the tech sector is driven by high growth, whereas SBC offers an attractive offering for competitive employees. And to prioritize growth, tech companies can better utilize their limited cash reserves.However, those tech companies with ample cash reserves dominated stock trading over the last two years. However, compared to 2023, should investors revise their narrative about Mag7.
How Do Mag7 Stocks Stack Up?
The phenomenon of Magnificent Seven stocks can be explained simply. Modern civilization turned digital, and online services became ubiquitous. More importantly, these companies centralized most of the services by absorbing smaller competitors as they popped up. Eventually, online presence turned from decentralized to account-based, pushed by the .Lastly, with a global reach courtesy of USG hegemony, these companies cornered online presence. The exception is China, having made a concerted effort to push its own alternatives like , buoyed by the Golden Shield Project, which is commonly referred to as the great firewall of China.With such market entrenchment, the Mag7 became perceived as safe haven assets, especially during the time of high inflation. So much so that 70% hedge fund managers called the Mag7 the most crowded long bet trade in BofA monthly survey mid-year 2024. Since then, long Mag7 bets subsided but still went up from 43% in October to 50% in November.Yet, it is now evident that Mag7 performance in 2024 will be quite different from 2023.
Not only is the tech sector outlier for SPX, but Nvidia is the outlier for Magnificent SevenIn 2023, Mag7 represented 28% of the S&P 500 market weight, and all companies outperformed the index by a large margin. At the tail end was Apple, but even Apple outperformed SPX at 48% vs 24% respectively.In 2024, even though Mag7 market weight increased to 31% by mid-year, which is itself more than double from a decade ago, Apple, Alphabet and Microsoft fell behind SPX performance of 25.43% YTD. It is clear that Nvidia became the synonym for the AI hype, as the main supplier of AI chips for data centers.The Big Tech is the main buyer of these chips, which shifted investor sentiment accordingly.
Mag7 Stock Valuations Ahead
Tesla (Nasdaq: TSLA) Valuation Boosted by Political WindsTesla has been a Mag7 outlier from the get-go. It only took some market lag to catch up. As , Elon Musk hitched his horses with Trump for a good reason. Without Trump’s victory and the promise of even higher tariffs against China, TSLA stock would likely exit 2024 with low single-digit returns or even negative.Instead of prioritizing cheap entry EV model, resources have been funneled into dubious Cybertruck, which keeps suffering from a high price tag and frequent recalls. Yet, with legal warfare against Musk’s holdings likely out of the way, speculative drive for 2025 is there thanks to FSD and robotaxi potential.According to the Q3 conference call, a sub-$30k model is still planned for H1 2025. But it remains to be seen how much the price tag will be tied to the work-in-progress FSD feature. Alphabet (Nasdaq: GOOG) Facing Potential RestructuringOf the Big Tech stocks, Amazon (Nasdaq: AMZN), Microsoft (Nasdaq: MSFT), Apple (Nasdaq: AAPL) and Alphabet, the latter could see further drop after Trump’s DoJ takes over. Biden’s DoJ already secured Google’s monopolist verdict in August, that Google unlawfully maintained its dominance in the online search market. This antitrust drive was initiated by the Trump admin.However, it may be the case that Trump’s 2nd term would rather see Alphabet leadership change, opting to preserve the company’s structure as a geostrategic asset. On a Big Take podcast mid-October, Trump suggested as much, “What you can do without breaking it up is make sure it’s more fair,”.In the meantime, Alphabet’s entrenched market position enables the company to keep beating earnings per share estimates. The last one was beaten at a 15.85% positive surprise, at $2.12 reported vs $1.83 EPS forecasted. Against the present GOOGL price of $165.54, the average price target is still bullish at $207.9 per share.Amazon’s Logistics Still UnmatchedAhead of the holiday season, it is near-certain that AMZN stock should receive a boost. With a considerable advantage against retailers like Target, Amazon still managed to increase margins in Q3, again beating the EPS estimate of $1.43 vs $1.14 expected.Alongside its tri-core business model, e-commerce, AWS cloud infrastructure and advertising, the company’s Prime Video ad monetization with ad-supported tier is turning up .Relative to the current AMZN price of $197.77 per share, the median price target is $238.31. Presently, the bottom outlook of $197 per share is aligned.Meta Platforms Welcomes Trump AdminIt is notable that Mark Zuckerberg publicly apologized for facilitating censorship collusion with the Biden admin. This is a clear signal for the incoming Trump admin. , Zuckerberg personally called Trump after the 1st assassination attempt, having “actually announced he’s not gonna support a Democrat because he can’t because he respected me for what I did that day.”Such relations would go a long way under a new FCCPC regime. In Q3, Meta Platforms reported record revenue of $15.7 billion net income, a 35% year-over-year jump. Most recently on November 14th, the European Commission fined Meta for €797.72 million, related to tying Facebook Marketplace with personal social network.However, this should be put into the context of the euro falling to a two-year low this week, continuing the trend of . In other words, domestic conditions will have a far greater impact on Meta than EU fines that can be easily absorbed. To that end, much is expected of Meta-supported Llama AI models, even though they are open source LLMs.In fact, Nick Clegg, President of Global Affairs for Meta, in early November that Llama is being made ready for U.S. government agencies and national security contractors. This could boost META stock further, as demonstrated by (Nasdaq: ) trajectory this year.Against the present price of $558.25, META stock’s median price target is $661.97, with the bottom outlook of $530 per share. The high estimate is substantial, at $811 per share based on 45 analyst inputs.Microsoft’s Steady GrowthMicrosoft has been following similar cloud success to AWS with its Azure platform. The legacy tech company is also pushing for total integration of AI services across its products, complementing Azure demand. For FY25 Q1 ending October, Microsoft reported 16% YoY revenue growth to $65.6 billion and 11% net income increase to $24.7 billion.Intelligent Cloud division (Azure) recorded the largest growth as expected at 20%, pushing Microsoft to once again beat its EPS estimate of $3.08 vs $3.3 reported. This was the largest EPS surprise during 2024 at 7.14%.Against the present price of $412.72, the average MSFT price target is $496.84 per share. The bottom outlook of $425 is above the current price. However, it may be the case that Microsoft has become too stale for investors, who would prefer Nvidia.Nvidia Takes the Spotlight, AgainAfter , it is dubious to discuss if NVDA stock is overpriced. At $3.5 trillion market cap and a forward price to earnings (P/E) ratio of 54.73, it would seem superficially so. Nonetheless, it has yet to be accounted how many AI chips will be needed for video-generated content demand. This technology is still in infancy, yet rapidly developing.Although AMD is aiming to get closer, Nvidia so far cornered the market on computing power necessary for multimodal AI applications. Accordingly, the new generation of AI chips is likely to see as much demand as previous series. On Wednesday’s earnings call, Nvidia CEO Jensen Huang reiterated that “We will we’ll ship more Blackwells next quarter than this [quarter], and we’ll ship more Blackwells the quarter after that than than our first quarter,”Given the uncertainty around AI products, as this space is still under development, it may be the case that Nvidia is fairly valued. For the time being, the average NVDA price target is $174.87 vs current $142.14 per share. The bottom outlook of $135 is close, while a more optimistic forecast puts NVDA stock at $220 per share.Apple’s New M4 ChipsJust behind Nvidia at a $3.46 trillion market cap, Apple has been relying on to keep investors interested. Over the last three months, AAPL stock effectively flatlined returns at positive 1.2%. Over the years, Apple’s global expansion has been threatened by Chinese phone manufacturers Huawei and Xiaomi, but Apple still holds dominance at as of October 2024.At a forward P/E ratio of 30.76, Apple’s yearly EPS forecast for 2025 is $7.43 compared to $6.09 ending September. The problem with AAPL stock, and why buybacks have become the norm, is that there is little room for expansion against cheaper Chinese competition.Although Apple pushed for certain quality standards, it is fair to say they are now equalized across the board. The latest , designed to boost AI apps, is likely to remain contained within the existing Apple ecosystem rather than grab new territory.The high price point of Apple Vision Pro, leading to a flop, had already demonstrated diminishing returns from high-margin products. Nonetheless, strong Apple branding is here to stay. In the meantime, AAPL stock forecast has the least prospect of the Mag7. Against the present price of $229.61, the average price target is $245.06 per share. The bottom outlook is $184 while the high ceiling twelve months ahead is $300 per share.More By This Author:
