It was another brilliant start to the year for Wall Street. After the Dow Jones Industrial Average, S&P 500And Nasdaq Composite have all climbed to record highs in 2024.
While there were select strengths that fueled this rally in the broader market, Wall Street's gains rest primarily on the shoulders of the Magnificent Seven.
Image source: Getty Images.
Shares of the “Magnificent Seven” have pushed the broader market higher
When I say “Magnificent Seven,” I am referring to seven of the largest and most influential companies that have significantly outperformed the S&P 500 benchmark over an extended period of time. These seven stocks are (in descending order of market cap):
- Microsoft (MSFT -2.96%)
- Apple (AAPL -2.84%)
- Nvidia (NVDA 0.86%)
- Amazon (AMZN -1.95%)
- alphabet (GOOGL -0.51%) (GOOG -0.31%)
- Metaplatforms (META -1.60%)
- Tesla (TSLA -3.93%)
As mentioned, these stocks have been moving around the S&P 500 for quite some time.
MSFT data from YCharts.
But what they have really brought to investors are sustainable competitive advantages, if not completely impenetrable moats, in various aspects of their operations.
- Microsoft's Windows remains the world's leading desktop operating system, while Azure accounts for a quarter of global spending on cloud infrastructure services (as of September 30, 2023).
- Apple's continued innovation has given the iPhone a commanding market share lead among smartphones in the United States. The former largest company in the world also has the most extensive share buyback program in the world.
- Nvidia has become the infrastructure foundation of the artificial intelligence (AI) movement. Its A100 and H100 graphics processing units (GPUs) could account for up to 90% of GPUs used in AI-accelerated data centers this year.
- Amazon's online marketplace accounted for nearly 38% of online retail sales in the U.S. last year. Additionally, Amazon Web Services surpasses Microsoft's Azure as the world's leading provider of cloud infrastructure services.
- Alphabet's Google is a virtual monopolist and had a nearly 92% share of global Internet searches in February. Google Cloud is now the world's third largest cloud infrastructure provider and YouTube is the second most visited social website.
- Meta Platforms monitors major social media assets including Facebook, WhatsApp and Instagram. Meta's family of apps attracted nearly 4 billion monthly active users in the December quarter.
- Tesla is North America's leading electric vehicle (EV) manufacturer and the first automaker to develop from the ground up to mass production in over half a century. It is also the only pure-play electric vehicle manufacturer that generates a recurring profit based on generally accepted accounting principles (GAAP).
Despite these clearly defined competitive advantages, the outlook for these seven companies could be very different. As March begins, one Magnificent Seven stock stands out as a hidden bargain, while another high-flyer is likely facing increasing headwinds.
The “Magnificent Seven” stock should be bought immediately in March: Alphabet
Among the seven long-term outperformers listed above, Alphabet is the most attractive Magnificent Seven stock for opportunistic investors in March.
If there's one thing Alphabet can be accused of, it's that it's a cyclical company. Last year, advertising accounted for 76% of the company's $86.3 billion in net sales. If the U.S. economy were to slip into a recession, it's practically a given that companies would cut their advertising budgets. Currently, some money-based metrics and forecast indicators suggest that the likelihood of an economic downturn in the not-too-distant future is high.
However, economic cycles are not uniform. While no recession has lasted longer than 18 months since the end of World War II, there have been two periods of growth that lasted longer than a decade. Advertising-driven companies like Alphabet (and Meta, since we're talking about the Magnificent Seven) are primed for a long-term uptrend as the US economy expands.
There's no question that Alphabet's Internet search segment, Google, is the foundation. With nearly 92% of global searches, Google is the undisputed company that businesses will look to when it comes to placing ads to target consumers. In most cases, Alphabet is likely to have exceptional ad pricing power.
But as I've noted in the past, Alphabet's growth story is about much more than just being the dominant Internet search engine. Google Cloud has captured about 10% of the global cloud infrastructure services market. Enterprise spending on cloud services is still at a relatively early stage, suggesting that this segment can sustain double-digit growth.
Additionally, Google Cloud achieved its first year of operating profits in 2023 after several years of losses. Cloud services consistently generate higher margins than advertising, suggesting Alphabet's cash flow growth will accelerate in the coming years.
YouTube is a beast too. Daily views of Shorts (short videos often lasting less than 60 seconds) launched in 2021 have catapulted from 6.5 billion in early 2021 to over 50 billion in early 2023. This should help the company attract advertisers as well as increase high-margin YouTube subscriptions.
Finally, Alphabet remains historically cheap. Because Alphabet reinvests much of its operating income, cash flow is the best metric for valuing the company. Investors can currently buy Alphabet shares for just over 12 times next year's cash flow estimates, a 31% discount to the five-year cash flow multiple.
Image source: Getty Images.
The Magnificent Seven stock should be avoided like the plague in March: Nvidia
However, not every Magnificent Seven stock is primed for lasting fame. Of the seven most influential companies that have lifted and changed Wall Street over the past year, it's semiconductor stock Nvidia that should be avoided like the plague.
To be fair, Nvidia has numerous competitive advantages in the AI space. The GPU shortage has driven up prices for its A100 and H100 chips, which in turn allowed the company to more than double its sales last year. While Nvidia's rise has been meteoric, the company will face plenty of headwinds.
One of Nvidia's biggest problems is itself. As supply chain issues ease and Nvidia expands production of its A100 and H100 GPUs to meet greater demand, GPU shortages will ease. The majority of Nvidia's revenue increases last year were driven by price-related shortages, as evidenced by its cost of sales falling in the first six months of fiscal 2024 (ending Jan. 28). If Nvidia expands production, it will likely cannibalize its own margins.
Nvidia will also face competition from all sides. modern micro devices accelerates the launch of its MI300X AI GPU while Intel is expected to begin fulfilling orders for its Gaudi3 AI GPU later this year.
The real concern is that many of Nvidia's largest customers are also developing their own chips for AI data centers. These include Microsoft, Meta Platforms, Amazon and Alphabet, which account for almost 40% of Nvidia's revenue. Not only are these four companies highly unlikely to continue Nvidia's recent purchasing activity, but the AI chips they develop will also reduce future dependence on the current AI boss.
Regulators aren't doing Nvidia any favors either. On two separate occasions, US regulators have restricted the export of powerful AI chips to China. These include AI GPUs that Nvidia developed specifically for the world's second-largest economy after regulators initially cracked down on exports. Regulators could hand Nvidia billions of dollars in lost revenue every quarter.
Chasing corporate insiders' money is another reason to avoid Nvidia like the plague. Although there has been a lot of selling, there hasn't been a single insider purchase in more than three years. Insiders buy for one reason only: they believe the stock will go up. If they don't add anything, why should you?
Perhaps the biggest concern for Nvidia and its shareholders, however, is that every forward-looking investment trend over the past 30 years has experienced an initial bubble. Investors often overestimate the introduction of new technologies and innovations; and it once again seems to be happening in real time.
Nvidia is valued at nearly 34 times trailing 12-month sales, which is similar to a valuation Cisco systems during the peak of the dot-com bubble. This makes Nvidia an interesting story stock, but one that should be avoided like the plague for investment purposes in March.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool's board of directors. Sean Williams has held positions at Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short February 2024 $47 calls on Intel and January 2026 short $405 calls on Microsoft. The Motley Fool has a disclosure policy.