Big tech companies, which have dominated Wall Street after driving the market to record highs in the first half of 2024, are now struggling with the aftereffects of a global sell-off that has wiped nearly $1 trillion (£755bn) off their combined market capitalisation.
The so-called “Magnificent Seven” is a term popularized on Wall Street inspired by classic Western movies and includes tech giants Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA). These companies played a key role in driving the rise of the S&P 500 (^GSPC) last year, with a Morgan Stanley report highlighting that these seven companies alone accounted for half of the index’s total return.
The combined market capitalization of the Magnificent Seven exceeds the entire stock markets of the UK, Japan, France, China and Canada. But the group has recently suffered major setbacks: Six of the seven companies reported second-quarter earnings that fell short of the lofty expectations set by investors.
Tesla, for example, saw its profits plummet by more than 40% despite sales beating expectations. Amazon’s shares plummeted 11% after the company released its earnings. Growing concerns about the health of the U.S. economy also fueled a wave of selling in global markets.
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“Coming into earnings season, the ‘Magnificent Seven’ stocks faced nearly impossible expectations to beat perfection,” said Anna Rathbun, chief investment officer at CBiz Investment Advisory Services. “So, in some ways, it’s not surprising to see stocks selling off here.”
In some cases, the Mag 7 is just too expensive. Nvidia’s valuation has skyrocketed, putting it out of reach for many value investors. The company decided to do a 10-for-1 stock split in July to make shares more affordable for a broader range of investors when the stock was around $1,210. Now, the company’s shares are trading around $120 as the countdown continues until earnings are released.
The chipmaker, which has a market capitalisation of $3.2 trillion (£2.4 trillion), will determine the direction of tech stocks when it publishes its results later on Wednesday and will provide a gauge for AI spending and investment in new technologies by other companies.
As the AI rally enters a critical phase, investors should consider alternatives for diversifying their portfolios and where to look for undervalued stocks that could benefit from artificial intelligence. Here are some companies to watch.
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5 Alternatives to The Magnificent Seven
ASML makes lithography equipment that is essential to making silicon-based microchips. (REUTERS/via Reuters)
The AI stock surge is being driven by demand for the world’s most advanced chips, with Dutch company ASML making the lithography equipment essential to making them.
Though it’s less well known, ASML is a company that any investor looking to profit from the growth of artificial intelligence should be keeping an eye on.
ASML is virtually the only provider of extreme ultraviolet (EUV) lithography equipment, which is essential for making silicon-based microchips, and its customers include semiconductor giants such as TSMC (TSM) and Samsung (005930.KS).
“ASML is further evidence that the AI boom is still going strong, as demand for the semiconductor equipment maker is surging,” said Dan Coatsworth, investment analyst at AJ Bell, when ASML reported quarterly earnings in July.
Despite the recent share price decline, the current share price of around $920 is more than 20% below analysts’ estimated target of $1,194, and the majority of analysts still view the stock as a Strong Buy.
“Companies across countless industries are investing heavily in AI, which means semiconductor manufacturers have the confidence to build more fabs,” Coatsworth added. “This translates into greater demand for ASML’s equipment, which plays a key role in making computer chips.”
However, the stock price turned negative after ASML’s third-quarter earnings outlook fell short of expectations. Nearly half of ASML’s sales still come from China, and geopolitical risks remain a major concern for investors.
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ASML is part of a group of “internationally recognized, high-quality, growth conglomerates” known as “Granola,” according to Goldman Sachs, and Europe’s answer to the “Magnificent Seven.” The eleven companies in the group, named for their initials “Grannnllass,” are GlaxoSmithKline (GSK.L), Roche (ROG.SW), ASML, Nestle (NESN.SW), Novartis (NOVN.SW), Novo Nordisk (NVO), L’Oreal (OR.PA), LVMH (MC.PA), AstraZeneca (AZN.L), SAP (SAP) and Sanofi (SNY).
Novo Nordisk (NVO)
The weight-loss drug has proven successful among celebrities. (Reuters/Reuters)
Another member of Granola, Novo Nordisk, is currently Europe’s largest company by market capitalization and, unlike the Magnificent Seven, doesn’t invest in the technology sector. For those who believe AI is a bubble or simply want to diversify, it may be an attractive option.
The Danish company makes the weight-loss and diabetes drugs Wegovi and Ozempic, which have become widely popular among celebrities such as Tesla (TSLA) CEO Elon Musk and TV personality Oprah Winfrey.
Sam North, market analyst at eToro, told Yahoo Finance UK: “Novo Nordisk has emerged as the pre-eminent choice in Europe. The Danish pharmaceutical giant has gone from strength to strength over the past few years and is now Europe’s largest stock by market capitalization.”
“Analysts are optimistic about Novo Nordisk’s performance, particularly its blockbuster weight-loss drug Wegovy. The company reportedly sold 10.4 billion Danish kroner (£1.2 billion) of Wegovy in the first quarter alone, more than double sales on the same period last year.”
He added: “From a technical analysis perspective, there are several levels that we believe can serve as sentiment indicators for bulls to keep an eye on. The DKK 740 level represents a potential entry point for those looking to buy low, while a move above DKK 928 could signal a rally towards previous highs. In a challenging market timing environment, Novo Nordisk stands out as a resilient and promising stock to add to any portfolio.”
Novo Nordisk’s shares have soared by around 260% since launching Wegovy in the US in June 2021. The company’s market capitalisation of £455 billion is now larger than the size of the entire Danish economy.
The group, which owns the Louis Vuitton brand, has seen resilience in the consumer discretionary sector. (Pablo Cuadra via Getty Images)
LVMH has been overtaken as Europe’s largest company by Novo Nordisk, but it remains a strong contender.
Despite challenges in the consumer discretionary sector, LVMH continues to post strong profits, with operating margins of 25.6% in the first half of the year, well above pre-COVID levels. This equates to an operating profit of €10.7bn (£9.02bn/$12bn). Additionally, free cash flow increased 74% to €3.13bn, or 7.5% of sales.
The company’s stock price has fallen amid slowing growth, and it trades at a price-to-earnings ratio of 22:2.
LVMH’s diversified conglomerate model includes brands such as Tiffany, Dior, Fendi, Givenchy, Marc Jacobs and Sephora, allowing it to operate in a range of luxury sectors.
Growth is also likely to improve as inflation and interest rates continue to fall globally.
Snowflake (SNOW)
Snowflake Chairman and CEO Frank Slootman presents Nvidia CEO Jensen Huang with a snowboard. (Reuters/via Reuters)
Returning to the US and the tech industry, Snowflake is well positioned to benefit from the surge in AI: “You can’t have an AI strategy without a data strategy,” Snowflake CEO Frank Slootman said.
The company focuses on data management services, collecting and analyzing organizations’ data to provide insights that help grow their business. With the rise of AI, this data has become even more valuable.
Demand for Snowflake’s data management platform is driving strong revenue growth. Snowflake expects to achieve revenue of $2.8 billion in fiscal 2024, up 36% from $2.1 billion in the prior year. The company expects revenue to continue to grow, projecting revenue of $3.3 billion in fiscal 2025.
However, analysts remain cautious, which could mean the stock is currently undervalued.
“Easing optimization headwinds and the emergence of new product initiatives should support growth, but investors may need more concrete signals before getting involved,” Morgan Stanley analyst Keith Weiss said in a report.
According to data from Yahoo Finance, seven analysts have given Snowflake a “strong buy” recommendation, while 24 have rated it a “buy.” The market consensus is for the stock to trade at $166, up from the current price of $118, with a forecast high of $220.
Rolls Royce (RR.L)
Rolls-Royce has surprised investors under new CEO Tufan Erginbilgic. (Reuters/Reuters)
Rolls-Royce is not part of the Magnificent Seven, is not listed under the European granola and is a member of the FTSE 100 (^FTSE), but is surpassed in value only by Nvidia. So can Rolls-Royce replace the Magnificent Seven?
The company has delivered a total shareholder return of 221% over the past year, matching Nvidia’s performance, and the surprising performance reflects growing investor confidence in the turnaround plan laid out by new CEO Tufan Erginbilgic.
Elginbilgic’s vision for Rolls-Royce is ambitious, transforming it into a leaner, more profitable business with a bright future: He aims to significantly increase adjusted operating profit from around £250 million to between £2.5 billion and £2.8 billion by 2027.
This growth is underpinned by a strategy to save £2 billion in working capital, primarily through improved inventory management. These efficiencies are expected to help the company increase free cash flow from £500 million to between £2.8 billion and £3.1 billion over the next five years.
The company’s shares have more than quadrupled since Elginbilgic joined the company, topping London’s main stock index. The rise is all the more remarkable given the struggles Rolls-Royce has endured over the past few years, including coming close to bankruptcy during the pandemic.
The biggest recovery is expected to come from civil aviation, which accounts for almost half of group sales, with the rest split roughly evenly between Rolls-Royce’s defence and power systems divisions.
Mr. Elginbilgic thinks commercial aviation’s adjusted operating margins can rise from 2.5% to 14.5% to 16.5% by 2027. While the improvement seems dramatic, this profitability level is in line with some of its rivals.
Rolls-Royce currently trades at a price-to-earnings (P/E) ratio of 18. Some investors might argue that this valuation is not cheap, but it is not particularly high for a blue-chip company in the FTSE 100 index.
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