What a difference a year can make. Since tumbling into a bear market in 2022, all three major U.S. stock indexes have bounced more than 20% off of their lows. By one definition, that puts the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite in a new bull market.
However, this has been anything but a traditional rally. A significant portion of the year-to-date gains built up in the S&P 500, Nasdaq Composite, and especially Nasdaq 100 are the result of the outperformance of the "magnificent seven."
Image source: Getty Images.
The magnificent seven refers to a group of supercharged, widely owned, megacap growth stocks that, through the closing bell on July 21, have gained between 36% and 203% for the year. The magnificent seven includes:
- Apple (AAPL 0.34%)
- Microsoft (MSFT 0.12%)
- Alphabet (GOOGL 0.84%) (GOOG 0.83%)
- Amazon (AMZN 2.07%)
- Nvidia (NVDA -2.06%)
- Tesla (TSLA 0.64%)
- Meta Platforms (META 1.14%)
Aside from the sheer magnitude of their outperformance in 2023, these are all businesses with well-defined competitive advantages within their respective industries. For example:
- Apple accounts for roughly half of all U.S. smartphone market share in the U.S.
- Microsoft's legacy operating system, Windows, still dominates desktops, while Azure is currently the world's No. 2 cloud infrastructure service provider.
- Alphabet's internet search engine Google was responsible for nearly 93% of worldwide search share in June 2023.
- Amazon's online marketplace brings in around $0.40 of every $1 spent in online retail sales in the U.S., while Amazon Web Services (AWS) is the leading cloud infrastructure services provider.
- Nvidia's artificial intelligence (AI)-driven graphics processing units (GPUs) dominate enterprise data centers.
- Tesla is the world's leading electric vehicle (EV) manufacturer and the only pure-play EV stock generating a recurring profit.
- Meta Platforms' social media real estate is unmatched, with Facebook, Instagram, WhatsApp, and Facebook Messenger attracting more than 3.8 billion unique monthly visitors in the first quarter.
The dominance of the magnificent seven isn't lost on Wall Street. However, analysts have differing takes on where this group heads next. Based solely on the consensus price targets of dozens of analysts, three magnificent seven stocks stand out as clear-cut buys, while another is worth avoiding.
Magnificent seven stock No. 1 to buy, according to Wall Street: Alphabet
Based on the collective think tank that is Wall Street, Alphabet offers the most upside among the magnificent seven. The company's Class A shares (GOOGL) closed out last week at $120.02, which compares to a consensus one-year target price of $135.38 among the more than three dozen analysts covering the company. This represents upside of 13%, with some analysts, such as Ivan Feinseth at Tigress Financial ($172 price target), expecting Alphabet to have plenty of run still left.
As noted, the lure of Alphabet is its cash-cow operating segment, Google. It's been more than eight years since Google has accounted for less than a 90% global share of internet search in a given month. Operating as a veritable monopoly means it possesses strong ad-pricing power.
But don't overlook Alphabet's ancillary segments, such as Google Cloud or streaming platform YouTube. The latter is the second-most-visited social media site on the planet and was generating north of 50 billion daily views from Shorts (short-form videos often lasting less than 60 seconds) during the first quarter.
Meanwhile, Google Cloud is the global No. 3 in cloud infrastructure services, behind only Microsoft's Azure, and AWS. Cloud margins are typically much juicier than advertising margins, which makes this operating segment a major growth driver for Alphabet.
Magnificent seven stock No. 2 to buy, according to Wall Street: Nvidia
A second magnificent seven company with double-digit upside is GPU giant Nvidia. The consensus of around three dozen covering analysts is for Nvidia to reach $491.50 per share. Based on its closing price of close to $443 on July 21, we're looking at roughly 11% upside still to come.
The more than 200% year-to-date gains registered by Nvidia are the result of hype surrounding AI. Since AI has broad applications in virtually all sectors and industries, and Nvidia's GPUs account for roughly 90% of the chips being used in AI-driven enterprise data centers, it looks to have a clear path to sustained double-digit growth.
But this is one instance where Wall Street appears reactive rather than proactive. While it's true that Nvidia's second-quarter sales forecast blew away estimates, we've witnessed numerous instances over the past 30 years when next-big-thing investments eventually failed to live up to investors' lofty expectations. AI-driven products and services are going to take time to mature, which will likely make it difficult for Nvidia to sustain its current valuation.
Nvidia is also facing possible headwinds from U.S. regulators, who may want to further clamp down on export restrictions to China. Although the company developed a slower version of its AI GPUs, additional restrictions could adversely impact around a quarter of Nvidia's total sales.
Image source: Amazon.
Magnificent seven stock No. 3 to buy, according to Wall Street: Amazon
The third and final magnificent seven stock with consensus double-digit upside, based on Wall Street's price targets, is e-commerce behemoth Amazon. The roughly four dozen analysts covering Amazon expect it to reach $143.17, which is about 10% above its closing price of $130, as of July 21.
Although Amazon generates a lot of its revenue from its online marketplace, retail sales are a generally low-margin operating segment. The key to its success lies with the continued outperformance of its faster-growing and higher-margin ancillary segments: AWS, subscription services, and advertising services.
Tech analysis firm Canalys pegged AWS' share of global cloud infrastructure services at 32% as of the end of March 2023. Best of all, enterprise cloud spending still looks to be in its early stages of growth. Despite accounting for around a sixth of Amazon's net sales, AWS has consistently generated 50% or more of the company's operating income.
With regard to subscription services, Prime has been a beast. Amazon crossed above 200 million global Prime subscriptions in April 2021 and more than likely has added to its total since claiming the exclusive rights to Thursday Night Football.
Based on projected cash flow in 2024 and beyond, Amazon stock is cheaper than it's ever been.
The magnificent seven stock to avoid, per Wall Street: Tesla
However, not all the magnificent seven are pegged as winners. Collectively, Wall Street analysts believe EV maker Tesla is worth $230.18 per share. That's about 12% below where shares closed at on July 21 ($260.02).
Though Tesla has a pathway to manufacturing north of 2 million EVs annually, and it's the clear-cut EV production and delivery leader in North America, there is no shortage of red flags.
First, Tesla has aggressively reduced the price of its EV lineup on a half-dozen occasions since the year began. While optimists had held out hope that these price cuts were a reflection of improved production efficiencies, CEO Elon Musk noted during the company's first-quarter shareholder meeting that Tesla's pricing strategy is based on demand. If Tesla is slashing prices by up to 20% in under a year, it's a reflection of rising inventories and weaker demand. That's bad news for the company's automotive gross margin.
Elon Musk has also proved to be a risk for Tesla's shareholder base. Even though he's an innovator, Musk has previously drawn the unwanted attention of securities regulators. Perhaps more concerning, Musk has made an abundance of promises that simply haven't been fulfilled, such as fully autonomous EVs being perpetually "one year away."
Lastly, Tesla's valuation is in nosebleed territory. Whereas highly cyclical auto stocks typically trade at high-single-digit price-to-earnings (P/E) ratios, Tesla is commanding a P/E ratio of 75, relative to Wall Street's consensus earnings for 2023. With virtually all the company's profits dependent on its ability to sell and lease EVs, it should be valued like an auto stock, not a multifaceted growth stock.
