Even as the stock market bounced back this year, much of the vitality came from just a handful of tech giants. Once known as FAANG, realigned markets now prefer these seven stocks – collectively called “The Magnificent 7.”
These stocks jumped more than 60% this year as a group, as the rest of the S&P 500 stocks climbed a comparatively paltry 7%. Bringing the index’s average up to a decent 18% return since January, it’s clear these winners are driving today’s markets.
But economic warnings signs are flashing, making it critical for investors to examine which of the Magnificent 7 are worth holding today.
Consumer credit card debt hit an all-time high in August, and personal savings rates fell to just 4% (30% lower than their mid-pandemic high). Inflation isn’t yet under control. Plus the Fed will likely keep rate hikes coming, which disproportionately affects these tech megaliths.
Some of the Magnificent 7 are worth buying or holding, to be sure, but investors should sell some as fast as they can. Here’s where I stand on these stocks today.
Apple (AAPL): SELL
Apple (NASDAQ:AAPL) may be a tech titan with a remarkable 50% YTD surge, but warning signs are flashing for his member of the Magnificent 7. Apple’s fallen 5% since it topped a $3 trillion market cap, with more downside on the way.
Apple’s constrained supply chain disruptions are concerning for a company as reliant on overseas manufacturing. After the announcement, Apple trimmed production forecasts for its forthcoming mixed-reality Vision Pro headset, signaling potential challenges ahead.
While the initial product push is aimed at developers and constitutes a small portion of Apple’s revenues, it underscores the firm’s vulnerability to supply chain hiccups.
That’s noteworthy because scrambling to diversify beyond core products risks dividing attention, which could result in many poorly-planned products being rushed to market.
But resumed student loan payments could dent Apple’s sales the most. Around 34% of adults aged 18-29 carry student debt, a demographic that heavily overlaps Apple’s customer base. When combined with dwindling savings, this could cause reduced spending on Apple products.
Apple certainly isn’t going anywhere, but this Magnificent 7 stock is facing too many problems at too hefty a valuation today.
Microsoft (MSFT): HOLD
Microsoft (NASDAQ:MSFT) is going all-in on AI, which bodes well for the long term but will hamper short-term prospects as the company dumps cash into new projects.
This member of the Magnificent 7 has already committed $10 billion to OpenAI and a $1.3 billion joint venture with AI startup Inflection. Internally, Microsoft is significantly increasing capital expenditure by directing 40% more funds into expanding internal AI capabilities, which now stand at $10.7 billion.
These investments primarily support data centers and hardware capacity to accommodate growing AI projects.
Although these expenses may temporarily constrain growth, Microsoft holds a formidable position in the market.
Its products, including Microsoft 365 and cloud services, are integral to corporate operations, fostering brand loyalty through high switching costs.
However, Microsoft faces mounting competition from free alternatives like Google, especially as economic conditions prompt cost-cutting among household and corporate users.
Microsoft’s strategic focus on AI is poised to revolutionize its Office products, tailoring them to specific sectors and tasks. For instance, Excel’s integration with Bloomberg Terminal solidifies its indispensability in financial markets. Microsoft aims to empower users with even more customized and insightful tools as AI technologies mature.
In the short term, these investments may require Microsoft to optimize its operations further in case of economic downturns. The rise of free and freemium office productivity tools poses another challenge. Microsoft’s future appears promising, but it must balance AI-driven investments and cost-conscious consumers to maintain its financial health.
Alphabet (GOOG): HOLD
Despite limited growth prospects, Alphabet’s (NASDAQ:GOOG) diversified services continue generating revenue for this Magnificant 7 giant. In the second quarter, total revenue reached $74.6 billion, marking a 7% increase from the previous year.
Advertising revenue bounced back, rising by more than 3%, following two consecutive quarters of decline.
Management attributed growth to improvements in both search (up 5.6%), driven by retail strength, and YouTube (up 4.4%), partially offset by the ongoing weakness in advertising technology revenue (down 5%).
Cloud revenue experienced a robust 28% increase, while other services, including hardware and Google Play, grew by 10%.
The accelerated growth in Google’s primary search business underscores the resilience of its network effect. That’s notable in the face of challenges posed by Microsoft and OpenAI.
Furthermore, YouTube’s advertising revenue rebounded. Management attributed the gain to a more balanced mix of broad-based and direct response ad demand, improvements in YouTube Shorts monetization, and increased demand for ads on connected TVs.
Ultimately, Alphabet’s offerings remain dominant even as entrants begin edging the company out in the AI market. Still, Alphabet’s position is unquestionably strong, making this Magnificent 7 stock worth holding.
Amazon (AMZN): BUY
Amazon (NASDAQ:AMZN) remains a no-brainer when buying Magnificent 7 stocks. Recent retail sales figures show modest growth, a 9% increase in revenue.
Although lower than the previous year, even a modest jump demonstrates the company’s resilience in a tighter economic environment.
Amazon’s commitment to cloud services and artificial intelligence positions it as a long-term, stable player in the sector. Cloud revenue surged by 12% in the most recent quarter, offsetting modest retail growth. Amazon’s cloud-based AI endeavors have broad applications that will serve the stock well.
Amazon’s cloud computing will capitalize on consumers’ growing adoption of AI tools, no matter the platform leveraged as more companies rely on the cloud for the massive data storage and computing demanded by AI.
This strategic alignment with the AI revolution diversifies Amazon’s offerings, complementing its continued retail dominance.
And, on the retail front, Amazon is entering new markets despite its dominant position. Amazon recently expanded its horizons by partnering with Shopify (NYSE:SHOP), enabling customers to connect their stores directly to Amazon-distributed product pages. This strategic move opens new markets for Amazon.
At the same time, it benefits Shopify’s prospects as Amazon sellers seek to expand their digital presence through the platform.
NVIDIA (NVDA): SELL
NVIDIA (NASDAQ:NVDA) is driving the Magnificent 7 stock gains, fueled largely by the AI fervor. However, signs suggest this tech stock might soon face a reality check.
Notably, the stock is currently trading at an eye-popping 117 price-to-earnings ratio, signifying continued overvaluation. Even a minor misstep could trigger a significant post-earnings drop, regardless of its promising long-term prospects.
It appears that Nvidia’s pricing has reached an upper limit, leaving little room for further growth.
Undoubtedly, Nvidia holds considerable long-term potential, especially given its pivotal role in AI initiatives due to its dominant hardware position.
Given its current valuation, investors may want to consider capitalizing on gains by selling while the opportunity remains favorable.
Tesla (TSLA): BUY
Tesla’s stock has been continuously progressing, delivering a remarkable 140% return since January. Beyond its dominant market position, investor enthusiasm is soaring due to the imminent launch of the Cybertruck, scheduled for release in a matter of weeks.
The Cybertruck’s distinctive appearance and features have generated substantial online buzz and promotional excitement. Simultaneously, Tesla is gearing up to introduce the updated Model 3, internally known as “Highland,” in China, with production slated to commence in September.
Boasting a commanding 59% share of the electric vehicle market, Tesla unquestionably stands out as the most viable option for EV-focused investors, and the only option of its kind among its Magnificent 7 peers.
Meta (META): SELL
In a frantic attempt to maintain relevance among younger users who gravitate toward X (formerly Twitter), Meta (NASDAQ:META) launched its ambitious Threads venture in July.
A month later, the market’s response seems marked by a collective indifference. While Threads had neared the 50 million user mark at the outset of July, a mere 10 million users remain engaged a month later. These remaining users spend, on average, a mere three minutes on the platform.
The exact cost of this venture for Zuckerberg and the Meta team remains undisclosed. Still, it’s abundantly clear that their investment hasn’t yielded the expected returns.
This endeavor follows closely on the heels of the ill-fated metaverse venture. Considering this substantial spending alongside diminishing ad sales, declining revenue, and dwindling income, it becomes evident that Meta is no longer the formidable force it once was.
There may still be a window of opportunity for the Meta team to course-correct. Still, with a price-to-earnings ratio of around 35, it’s apparent that Meta is currently overvalued.
Its valuation and share price appear unsustainable in today’s fiercely competitive landscape, compounded by the prevailing economic conditions. If you haven’t already divested from Meta, now is the time.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.