The Magnificent Seven: Tech Giants Dominating Markets and AI Innovation

Magnificent Seven: Unstoppable Tech Giants or Risky Buys? | The Motley Fool

Did you know the "Magnificent Seven" moniker was meant as a warning, not an endorsement? Check out the risks and rewards of owning these dominant tech stocks. Every investor knows the "Magnificent Seven" stocks. But did you know that the group name was more of a warning than a compliment? These days, the downsides envisioned by Bank of America executive Michael Hartnett are clearer than ever. This group of tech giants has controlled the value of the S&P 500 (^GSPC 0.38%) index over the last two years. I came up with a handy mnemonic to keep track of the seven components shortly after Hartnett started using the Magnificent Seven name in May 2023. "MAMA ANT" didn't catch on, but it still works for me. First, you have the four software companies: Then you have the three hardware stocks: Easy enough, right? These six artificial intelligence (AI) experts and one pioneer in electric vehicles are shaping the stock market. Fast-forward to November 2024, and you'll still find these seven companies at the very top of the market. They were among the 10 largest American stocks by market cap in the spring of 2023. By now, they have simply become the top 7. Only two Magnificent Seven stocks -- Microsoft and Apple -- have underperformed the S&P 500 since May of last year. The others have soared, pushing the cap-weighted index higher as a result. From the vantage point of May 2023, Hartnett outlined several risks related to the Magnificent Seven stocks. Michael Hartnett identified an important stock grouping fairly early and gave it a catchy name. He could have picked many other titles but chose a classic Western movie with a tragic ending. Alternative monikers could have been "seven deadly sins" or "seven plagues" but not "seven wonders of the world" or "seven colors of the rainbow." In the Yul Brynner and Steve McQueen movie, only three of the Magnificent Seven gunfighters survive the final battle. That's the metaphor Hartnett selected. I'm not saying that the big winners of the AI boom are doomed right now, but investors should keep an eye on potentially overheated valuations in this space. This grouping was meant as a warning, not an investment recommendation. The average S&P 500 stock is valued at 28.7 times price to earnings (P/E) and 23.6 times price-to-cash reserves (P/C). Alphabet and Meta Platforms stand out as reasonably priced AI giants, while Tesla and Nvidia look painfully expensive: Data source: Finviz.com on Nov. 9, 2024. P/E Ratio = price-to-earnings ratio. P/C Ratio = price-to-cash ratio. Meanwhile, the leading market indicators rely on these seven samurai to an extraordinary degree, and their importance is only rising. If a company like Nvidia or Microsoft runs into unexpected trouble, that event will move the stock market as a whole. That's the nightmare scenario Michael Hartnett wanted to caution his clients about 18 months ago. Pick your investments carefully, even in hot sectors like AI and electric vehicles. Diversification will help you survive any market calamity and build wealth in the long run. And that's the point Michael Hartnett was making with his Magnificent Seven metaphor last year -- this bundle of soaring giants looked good in the spring of 2023 (and still does today), but they might hurt your portfolio someday.

Will These 4 "Magnificent Seven" Tech Stocks Go Parabolic? Why You Might Win Even if They Don't. | The Motley Fool

These companies have delivered eye-popping results for many years -- and seem likely to keep doing so for the foreseeable future. You know the "Magnificent Seven" stocks," right? Even if you do, you might have trouble remembering all seven, just as I often have trouble naming all seven of Snow White's short companions. So here they are: They're referred to as "magnificent" in large part because of their amazing performance over the past years and decades. Check it out for yourself: The numbers above may depress you if you weren't holding any or many of the stocks over the past years. Don't despair, though -- it's not too late to become a Magnificent Seven shareholder! Specifically, four of the seven seem attractively or reasonably valued these days. Will these stocks' future returns be as robust as their past ones? No one knows, and they may not. But each of them could deliver parabolic returns -- with graphs of their performance moving sharply upward -- most likely over a short period. More importantly, even if they fall short of parabolic gains, the stocks below are likely to reward investors quite well over many years -- and that's more important than chasing parabolic gains. You might be interested in owning shares of Amazon because you're familiar with its truly massive online marketplace and you've been noticing its delivery trucks circling your neighborhood daily. But there's much more to the company, most notably its Amazon Web Services, the leading cloud computing platform. Despite its size, Amazon is still growing by double digits while investing in artificial intelligence (AI) and other promising technologies. Third-quarter revenue rose 11% year over year, while net income popped by 55%. With a recent forward-looking price-to-earnings (P/E) ratio of 34, well below its five-year average of 53, the stock seems appealingly valued. Meta Platforms (META -0.40%) used to be known as Facebook, but it changed its name to reflect the fact that it's about much more than just Facebook. It owns Instagram, Messenger, and WhatsApp, for example, and it's been busy investing in developing technologies such as AI, where it's spending billions. It has already deployed AI functionality into its social networking platforms, and CEO Mark Zuckerberg has said, "Meta AI is on track to be the most-used AI assistant in the world by the end of the year." Meta's third quarter featured revenue up 19% year over year, with net income up 35%. The company noted that it had 3.3 billion daily active users across its platforms, up 5% year over year. That massive reach is one reason Meta Platforms may keep growing rapidly, as it rakes in money via online advertising and finds other ways to monetize. With its recent forward P/E of 24 a bit above its five-year average of 21, the stock doesn't seem bargain valued, but does seem reasonably valued. So, if you believe in its long-term potential, you might invest in it now -- or add it to your watch list, hoping for a pullback in price. Another option is to spend a portion of what you want to spend on Meta shares now and plan to buy more shares later. Alphabet is another Magnificent Seven stock investing heavily in AI, with its dominant search engine Google now incorporating AI successfully. Alphabet is more than just Google, though, as it also encompasses YouTube, Fitbit, Nest, and other businesses. Some worry that due to antitrust concerns, Alphabet might get broken up. That might not happen, though, and if it does, it's not necessarily bad news for investors. Shareholders would likely end up with parts of any newly formed businesses. In the meantime, the business is growing quickly and is likely to continue doing so in the years to come. Its impressive third quarter featured revenue up 15% year over year and net income up 34%. With its recent forward P/E of 19 well below its five-year average of 23, the stock seems somewhat fairly valued. It's easy to see it growing robustly in the years to come, as it generates boatloads of cash, is in strong financial shape, and enjoys competitive advantages such as the network effect -- where, for example, YouTube is so huge that it's where video producers go to share videos with a huge audience. Then there's Microsoft, another multifaceted business that includes the seemingly ubiquitous Office productivity software, the Azure cloud computing platform, the Xbox gaming platform, and the Windows operating system, among other things. Microsoft is also -- yes, you guessed it -- well positioned to profit from the growth of AI, having invested billions in ChatGPT creator OpenAI and incorporating AI into many of its offerings. Microsoft is yet another behemoth managing to grow briskly. In its quarter ended Sept. 30, revenue jumped 16% year over year, while net income grew 11%. It exceeded expectations, but management's guidance for the coming quarter disappointed some. With its recent forward P/E of 31 close to its five-year average of 30, Microsoft seems appealingly valued. So consider investing in -- or holding -- one or more of these Magnificent Seven stocks, as they can help lead your portfolio to more magnificent results over the long term. They might even deliver some parabolic returns over some short periods.