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May 29, 2024

Fate of the ‘Magnificent Seven’ depends on delivering rapid revenue growth

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Feb 5, 2024

The so-called ‘Magnificent Seven’ megacap technology stocks – Microsoft, Apple, Amazon, Alphabet, Meta, Nvidia and Tesla – have led the US stock market rally over the past decade. But after a bumpy 2023, analysts say their future growth prospects depend on continuing to deliver strong revenue expansion in 2024 and beyond.

Magnificent Seven dominated markets

The Magnificent Seven have massively outperformed the broader market, growing to account for over 23% of the total value of the S&P 500 index. Their combined market capitalization now equals the annual GDP of 11 major global cities.

“These companies have been the backbone of US equity returns,” said Goldman Sachs analyst David Kostin. However, their future revenue growth rates remain pivotal, he warned.

Leadership built on supercharged growth

The magnificent seven companies operate in sectors with massive addressable markets, like electric vehicles, digital advertising, e-commerce and cloud computing. Their early leadership in these emerging growth areas allowed them to achieve incredible revenue expansion over the past 5-10 years.

For example, between 2015 and 2023 Tesla grew revenues at a 50% annual clip, Meta managed 26% annualized growth, while Microsoft and Apple boosted revenues by 15-16% per year. This supercharged top line expansion fueled equally impressive share price gains.

Company 2015-2023 Revenue CAGR 2015-2023 Share Price CAGR
Tesla 50% 63%
Meta 26% 20%
Microsoft 16% 32%
Apple 15% 31%

Revenue and share price growth rates for Magnificent 7 companies, 2015-2023. Source: Company reports, FactSet.

Growth engine sputtering?

Lofty valuations for these market leaders are based on the premise that massive revenue expansion will continue. But growth showed signs of slowing in 2023 amid rising inflation, interest rates and fears of recession.

Snap disappointed the market with weak Q4 results in February 2023. Netflix and Meta also missed first quarter estimates. Then in April Tesla shockingly reported its first sequential revenue decline since 2020. More worryingly, full year 2023 growth fell well short of the 50%+ rates investors had become accustomed to.

This stumbling by former market darlings raised concerns that the glory days for mega tech may be over. Some fear the Magnificent Seven could suffer the same fate as former giants like Cisco, Intel and IBM, which all eventually hit growth walls.

2024 a ‘make or break’ year

Most Wall Street analysts remain bullish on big tech’s prospects, despite the growth scares of 2023. However, they caution investors to carefully evaluate forthcoming 2024 results.

“This is a make-or-break year for the Magnificent Seven to prove skeptics wrong,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.

Faith in the mega caps rests on hopes that slowing growth was just a temporary blip. If top line expansion accelerates again in 2024 and beyond, today’s lofty valuations may be justified. But failure to reaccelerate could crush shares.

Outlook clouded by uncertainty

The economic backdrop remains challenging heading into 2024, making robust growth no sure thing. Persistent inflation and rising rates may continue weighing on consumer demand. Meanwhile, the threat of recession hangs over markets.

On the flip side, receding inflationary pressure could reinvigorate purchasing power later in 2024. And big tech companies have proven remarkably resilient through previous downturns.

Ultimately, the fate of the Magnificent Seven centers on delivering accelerating revenue expansion this year. Results over the next couple earnings seasons will determine whether these megacaps can reclaim their former growth luster.

Individual company outlooks

While sharing common themes, analysts see diverging prospects for individual Magnificent Seven components in 2024.

Microsoft

With dominant positions in cloud computing and enterprise software, Microsoft is seen as a steady eddy. “We expect double-digit revenue growth and margin expansion to continue in 2024,” UBS analyst Karl Keirstead wrote in a recent client note. Bulls think Microsoft’s diversified product portfolio leaves it less vulnerable to economic swings.

Apple

Tech’s largest company by market cap faces skepticism about demand for its pricey iPhones. But Apple has a legions of loyal customers, and analysts largely expect it to weather any storms. CEO Tim Cook said Apple is “not currently seeing economic weakness” in January. The company still grew revenues by over 5% in 2023 despite challenges.

Amazon

After boosting sales by nearly 20% annually from 2017-2021, Amazon’s growth slowed sharply in 2022 and 2023 amid e-commerce normalization post-Covid. But its market-leading AWS cloud division remains a key strength. “We believe growth will accelerate in 2024,” says Bank of America analyst Justin Post.

Alphabet

Google’s parent faces the most worrisome outlook among mega caps. Its core digital advertising arm is being squeezed by rivals and privacy changes. Alphabet relies more heavily on discretionary ad spend than peers, leaving it vulnerable to downturns. “We expect muted growth in 2024,” warns Morgan Stanley’s internet team.

Meta

Hit hard by pressures on digital advertising and competition from TikTok, Meta saw its first ever revenue decline in 2022. CEO Mark Zuckerberg aims to improve monetization and cut costs in 2023 while investing billions into speculative metaverse bets. Analysts remain skeptical on near term recovery prospects.

Nvidia

This semiconductor leader faces cyclical pressures on demand from gaming PCs and data centers. But its dominance of key growth markets like artificial intelligence and automotive leave Nvidia well positioned long term, analysts contend. “We recommend buying amid weakness,” according to Bank of America.

Tesla

After years of hyper growth, cracks emerged in Tesla’s armor in 2023 as deliveries slowed. Rising competition also clouds the electric vehicle pioneer’s outlook. However CEO Elon Musk expects 50% annual growth to continue over the next few years on surging EV demand. Whether Telsa can hit that ambitious target remains debated on Wall Street.

The wide divergence of prospects underlines that investors should assess each Magnificent Seven company independently heading into 2024 results. Their futures are no longer tied together, despite sharing superstar status for much of the past decade.

Also watching the ‘Terrific Ten’

Beyond the Magnificent Seven, analysts highlight a group of 10 additional large cap tech and internet stocks with strong prospects.

Dubbed the “Terrific Ten”, this group includes Adobe, Advanced Micro Devices (AMD), Broadcom, Cisco Systems, Intuit, Nvidia, Paypal, Qualcomm, Salesforce and Texas Instruments.

These companies operate in software, semiconductors and payments – sectors with robust demand tailwinds. Many are delivering double-digit revenue growth while trading at lower valuations than the mega caps.

Some strategists argue investors should diversify into this wider list rather than concentrating solely on just seven stocks. However, the Magnificent Seven remain undisputed in their influence over major indexes.

Historical precedents

Many compare today’s dominance of big tech to past periods where a few giant companies drove markets higher.

In the late 1990s, Cisco, Intel, Microsoft and others powered the dot-com bubble before it burst. More recently, Facebook, Amazon, Apple, Netflix and Google shaped markets coming out of the 2008 financial crisis.

Those previous episodes saw highly-valued market leaders eventually stumble. This history sparks worries that the Magnificent Seven too will hit limits to growth, crushing their valuations and the broader market.

Others counter that today’s megacaps hold stronger competitive positions in larger addressable markets than their predecessors, lessening downside risk. But unease persists over their immense influence and lofty expectations.

What’s next?

  • Markets will closely watch forthcoming 2024 results reports from each mega cap company, scrutinizing revenue trajectories. Accelerating growth could reinvigorate upside, while disappointment may confirm fears of lasting slowdowns.

  • Beyond quarterly scorecards, the economic backdrop through 2024 will impact tech spending patterns, shaping big tech fortunes.

  • Concentration concerns may spark antitrust scrutiny or proposals to limit mega cap influence on indexes. But tech giants look poised to remain market heavyweights for the foreseeable future.

The era of hyper growth lifted the Magnificent Seven to market domination, making their ongoing expansion pivotal to broader indexes. After a transitional 2023, coming results will determine whether these megacaps can reaccelerate momentum or if their best days are behind them. The fate of the magnificent seven – and potentially the whole US stock market – hangs in the balance.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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