Once hailed as invincible leaders of the new economy, the so-called Magnificent Seven tech giants have faced their share of troubles recently. Yet even after the turbulence of 2022, these seven American technology companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – remain dominant forces globally. Their collective market value exceeds the stock markets of major economies like Canada, Japan and the United Kingdom.
But past performance does not guarantee future success. Investors are questioning whether these tech titans can continue to deliver outsized growth. With economic headwinds on the horizon, it’s worth evaluating which of the Magnificent Seven are poised to outperform in the years ahead. According to Wall Street analysts, two stand out for their upside potential: Amazon and Tesla.
Revival In The Cards For Amazon?
After struggling through a period of high costs and restrained consumer spending, Amazon appears to be getting its groove back. The e-commerce and cloud computing giant posted robust third quarter results, with revenue up 15% to $127.1 billion. Advertising and cloud drove most of the gains, while the core online retail segment saw more modest 6% growth.
The profit picture was even better, with net income more than tripling to $2.9 billion compared to the same quarter last year. Cost-cutting initiatives finally seem to be paying off after several quarters of margin compression. Investors cheered the results, sending Amazon shares up 12% the next day.
While macroeconomic challenges persist, Amazon looks well-positioned to ride out any downturn. The company sits at the center of three massive and rapidly growing markets: online retail, digital advertising and cloud services. E-commerce still accounts for just 14% of total U.S. retail sales, leaving ample room for further penetration. Global digital ad spending is forecast to grow at a 14% annual pace through 2025. Meanwhile, worldwide spending on public cloud services could reach $1.3 trillion by 2028, according to Gartner.
As the market leader in all three areas, Amazon stands ready to capitalize on this growth. The company commands nearly 40% market share in U.S. e-commerce. Its advertising arm has quickly become the third largest player behind Google and Facebook. And Amazon Web Services leads the pack in cloud infrastructure, holding 33% global market share in the third quarter of 2022, per Canalys data.
Bulls believe Amazon’s dominant positioning across these key digital sectors will fuel double-digit revenue growth in the coming years. As cost pressures ease, expanding profit margins could turbocharge bottom line gains. Analysts polled by CNN forecast Amazon will grow earnings at a 35% annual rate over the next 5 years.
At a forward P/E of around 60, Amazon’s valuation reflects big expectations. But for investors willing to pay up for a dominant, multifaceted digital growth story, the e-commerce juggernaut may still offer compelling value.
Tesla Aims To Stay Ahead Of The Pack
As the world’s most valuable automaker, Tesla faces no shortage of skeptics betting on its downfall. Yet the electric vehicle pioneer keeps defying the naysayers. Despite headwinds from production challenges, demand concerns and price cuts, Tesla still managed to grow deliveries by 40% in 2022 to over 1.3 million vehicles. Profitability took a hit, with operating margins sliding below 15% in the fourth quarter. But with over $22 billion in cash reserves, the company has a substantial margin for error.
Now Tesla aims to press its advantage with what CEO Elon Musk bills as a “next-level” vehicle expected to launch later this year. Dubbed the Model 2, this smaller, more affordable EV is targeted at the mass market. Tesla aims to achieve a base price around $25,000 by simplifying manufacturing with new techniques like gigacasting of large components. The company believes its revamped “unboxed” production process could eventually cut costs in half compared to today.
By taking EVs more mainstream, the Model 2 could supercharge Tesla’s already industry-leading growth. The company’s deliveries surged 87% in 2021 and 40% in 2022 despite mostly selling premium sedans priced above $46,000. Adding a budget-friendly option opens Tesla up to a much wider audience. And growth in the installed user base sets the stage for recurring high-margin revenue from software and services.
Tesla is counting on its full self-driving (FSD) system to be a major profit driver in the years ahead. Currently offered as a $15,000 add-on (or $99 monthly subscription), the company is still fine-tuning FSD with the aim of Level 5 autonomy. Once the technology matures, Musk believes robotaxi services could make Teslas highly profitable “appreciating assets.
But monetizing FSD hinges on solving immense technical hurdles that have stumped automakers for decades. Tesla also faces strengthening competition from new EV startups and legacy automakers charging into the space. For bulls betting on massive growth from autonomy and services, Tesla at over 100 times forward earnings still looks like a buy. Bears may want to wait for more evidence the company can deliver on its vision.
Finding The Right Balance
In an increasingly uncertain economic environment, the go-go days of endless multiple expansion for hypergrowth tech names may be over. But Amazon and Tesla have cultivated dominant positions in markets that should keep growing for years to come. Wall Street analysts see their stocks offering the most attractive risk-reward in the Magnificent Seven cohort.
Of course, both companies face risks. Amazon must show it can sustain improved profitability, while Tesla needs to demonstrate progress toward full autonomy and high-margin recurring revenue. And further macroeconomic turbulence could dampen growth prospects.
For investors seeking exposure to two of tech’s most disruptive and innovative giants, modest positions in Amazon and Tesla seem warranted. Just don’t expect a smooth ride. The upside could be considerable if execution goes well. But these stocks will likely see plenty of hair-raising volatility along the way.
