Last year was a banner year for the group of high-flying tech stocks known as the “Magnificent Seven.” Fueled by strong tailwinds and bullish investor sentiment, these seven stocks soared over 100% on average, handily beating the broader market’s returns.
But the tide may be turning in 2024.
We’re barely a month into the new year, yet some cracks are already starting to show in these formerly unstoppable stocks. As a group, the Magnificent Seven are up only 10.5% year-to-date – not terrible, but a far cry from their meteoric rise in 2023. And drilling down further, some like Tesla are already deep in the red, having shed over 20% of their value since the year began.
So what’s causing this reversal of fortunes? And more importantly for investors, which of these formerly high-flying tech stocks are still worth buying amidst the turbulence? Let’s take a closer look.
The Winds Are Shifting
Last year, the Magnificent Seven had several factors working in their favor. The economy was booming, consumers were spending freely, and investors eagerly piled into the hot momentum stocks of the day. Companies like Tesla, Google, Apple and others were able to capitalize on these favorable conditions to drive strong growth and profits.
But the landscape is looking a little different early in 2024. Inflation remains stubbornly high, forcing the Fed to maintain its hawkish stance. Global growth is slowing. Geopolitical tensions still simmer. And with Treasury yields climbing, investors are getting more selective about valuations – putting richly priced growth stocks under pressure.
In this more challenging environment, the Magnificent Seven are no longer impervious to gravity. And some, like Tesla, are looking downright precarious.
Tesla’s troubles have been mounting for months. Demand is waning in the face of mounting competition. The company continues to miss its ambitious production targets. Quality issues persist. And CEO Elon Musk is distracted by his Twitter sideshow. As a result, TSLA stock has already plunged over 65% from its late 2021 peak, and more pain may be ahead. With the company now valued at over $400 billion despite selling just over 1.3 million cars last year, Tesla stock looks priced for perfection at a time when cracks are starting to show.
Even Apple, the world’s most valuable public company, is flashing some warning signs. Growth is slowing, especially in China where ongoing Covid restrictions and geopolitical tensions are taking a toll. Upgrade cycles are lengthening. And the company risks falling behind in key technological areas like AI. With the stock still trading at 25x earnings despite its massive size, AAPL may have gotten ahead of itself amidst the tech euphoria.
In short, the macro environment has become less favorable for many tech high-flyers. And company-specific issues plaguing the likes of Tesla and Apple underscore the risks. This new reality is reflected in the Magnificent Seven’s more grounded performance so far in 2024.
Still, not all is lost. Some of these stocks still possess promising futures if you know where to look. Here are three worth buying amidst the turbulence:
Apple – Cash Flow Machine With Loyal Customers
Despite some challenges, Apple remains a cash flow juggernaut with unparalleled brand loyalty. The company’s tightly integrated ecosystem of hardware, software, and services has created a virtuous cycle of rising sales and profits. As users become enmeshed in Apple’s world, they keep coming back for more.
Apple’s services business is booming, on pace to generate over $85 billion annually. New product categories like augmented reality could re-accelerate growth down the line. And the company continues to aggressively return cash to shareholders via ever-growing dividends and huge buybacks.
Meanwhile, Apple still owns over 50% of the lucrative U.S. smartphone market and remains the go-to choice for many affluent consumers worldwide. Its brand remains beloved. Yes, growth is slowing. But for a company of Apple’s massive size, mid single-digit revenue and earnings growth remains impressive.
With the stock trading at a reasonable 25x earnings, Apple remains a sturdy choice amidst the market turbulence. For long-term investors, buying Apple stock on the dips could pay off nicely.
Microsoft – Cloud Dominance Plus Shrewd AI Moves
Like Apple, Microsoft boasts an exceptionally wide moat thanks to its dominance in enterprise software. Its ubiquitous Office suite retains over 80% market share. Windows still powers over 70% of personal computers worldwide. And Azure, its cloud platform, is closing in on AWS for the cloud infrastructure crown.
Unlike Apple, however, Microsoft smartly pivoted to the AI revolution. It infused OpenAI’s ChatGPT across its offerings, supercharging products like Bing and Office with new conversational abilities. The company also holds a strategic stake in OpenAI. And its Azure cloud services saw usage surge as companies raced to tap into large AI models.
Growth remains robust, with Q2 revenue up 18% and earnings per share jumping 19%. Margins have room to expand as the cloud business scales. And like Apple, Microsoft returns tons of cash to shareholders via dividends and buybacks.
With dominant core businesses throwing off ample cash to fund emerging opportunities like AI, Microsoft remains a promising tech titan for long-term investors. The stock’s below-market 20x P/E leaves room for further upside.
Nvidia – The AI Chip Leader
Nvidia has cemented itself as the undisputed leader in advanced AI chips. Its GPUs now power everything from data centers to autonomous vehicles. Over 600 companies use its AI infrastructure platform. And its Omniverse platform is emerging as a vital 3D simulation engine for industries from manufacturing to healthcare.
Despite its $400 billion market cap, Nvidia still grew revenue by 21% last quarter. Its gaming and data center segments are both seeing booming demand amidst the AI revolution and metaverse movement. The company expects its addressable market to swell from $100 billion today to $1 trillion over the next decade as AI proliferates.
Between its rock-solid competitive position and massive growth runway, Nvidia remains a top way to play the AI megatrend. Though after its remarkable run, the stock isn’t exactly cheap at 45x forward earnings. But for risk-tolerant investors, buying Nvidia on dips could continue to pay off handsomely over the long-term.
The Bottom Line
After a magical 2022, the Magnificent Seven are seeing their wings clipped early in 2024 amidst a less forgiving market backdrop. Still, select stocks like Apple, Microsoft, and Nvidia remain promising long-term holds. Their wide moats, solid growth, and reasonable valuations make them durable choices amidst the turbulence. For investors with long time horizons, using market weakness to accumulate shares of these tech titans could create value for years to come.