The S&P 500 and Nasdaq has performed strongly in 2024 so far, both indices increasing around 8% YTD. The correlated performance of both indices is substantially attributable to the performance of the Magnificent 7 stocks which comprises Nvidia, Meta Platform, Amazon, Microsoft, Alphabet, Apple and Tesla.
These 7 stocks amount to 29% of the S&P 500 and 40% of the Nasdaq.
| Magnificent 7 stock | Ticker (NASDAQ) | Market Cap (US$ Trillion) | YTD total return | P/E ratio (times) |
|---|---|---|---|---|
| Nvidia | NVDA | 2.14 | 78% | 72 |
| Meta Platforms | META | 1.23 | 40% | 31 |
| Amazon | AMZN | 1.79 | 15% | 69 |
| Microsoft | MSFT | 3.01 | 9% | 37 |
| Alphabet | GOOG | 1.72 | -0.5% | 25 |
| Apple | AAPL | 2.67 | -7% | 27 |
| Tesla | TSLA | 0.56 | -28% | 41 |
Of the Magnificent 7 stocks, Alphabet, Apple and Tesla are the laggards this year when compared to their Magnificent 7 peers and the performance of the two indices, underperforming by -11%, -18% and -36% respectively.
Here we look at the current state of play for the three laggards and assess if these are worthy investments now.
1) Alphabet (NASDAQ: GOOG)
Alphabet (GOOG / GOOGL) did not perform so well in its 4QFY23 earnings report, with the shares taking a 6.5% hit post earnings.
Alphabet’s revenue was up 13% to $86.3 billion. Google’s advertising revenue for the quarter, at $65.5 billion, fell just short of analyst projections. Ad revenues include $48 billion of search revenue, up 13% and about $9.2 billion of YouTube ad revenue, up 15%. The company’s cloud revenue recorded better growth at $9.2 billion, up 25% YoY.
Alphabet’s net income came in at $20.69 billion, or $1.64 per diluted share, up substantially when compared to 4Q22’s $18.2 billion or $1.05.
Although Google’s services segment contributed most of the increase to net income, with 77% of the incremental revenue going directly to the bottom line due to economies of scale and cost management, it is worth mentioning that the Cloud segment turned a profit of $864 million as compared to a loss of $186 million a year ago, a $1 billion difference.
Number of Employees stood at 182.5k as compared to 190.2k a year ago after cost cutting measures took place.
The results, while generally above estimates, weren’t enough to satisfy investors. Facebook’s ad business is growing faster, and TikTok represents an ongoing competitive threat as younger users turn to the app to create short viral videos.
CEO Sundar Pichai said: “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”
However, it was recently disclosed that CEO Sundar Pichai sold 22,500 shares recently amounting to nearly $3m.
It is also worth reading Alvin’s recent coverage Alphabet’s situation here discussing Gemini, Alphabet’s own version of ChatGPT and Alphabet’s inability to keep up with OpenAI and Microsoft in the AI race.
2) Apple (NASDAQ: AAPL)
Apple is facing lawsuits on both sides of the Atlantic Ocean. The European Union recently fined Apple nearly $2 billion for unfairly favoring its own music streaming services and forbidding rivals like Spotify from telling users how they could pay for cheaper subscriptions outside of iPhone apps.
Apple is also going through several major lawsuits in the USA, against Epic Games over similar reasons as the one in the EU and was also recently hit by a consumer lawsuit claiming cloud storage monopoly on its mobile devices.
While its tech rivals have increased its investments in AI and have disclosed their progress, Apple has been conspicuously absent from this frenzy, raising concerns that it is falling behind in a vital new area. The company has assured investors that AI has long been woven into its software and services, but it is clear that Apple needs to make a bigger splash.
Apple has faced a slump in China in the last year due to China’s weak consumer spending. It was disclosed that the iPhone’s sales in China fell by 24% during the first six weeks of 2024. The entire market has been declining, but Apple is now sliding faster and losing share to cheaper competitors such as Vivo.
In a bid to spur demand, Apple rolled out rare discounts on its web store in January which would affect its margins.
Apple’s reliance on China both a market and manufacturing hub is also looking problematic from a political standpoint.
Apple is also winding down its car project, after spending nearly a decade and billions, while it meant the company was no longer spending billions of US dollars on a long-shot effort, it also leaves Apple without the next big revenue source.
Including Apple’s weak latest quarterly forecast, Apple’s revenue will have fallen in five of the last six quarters and should the company shrink instead of grow, this may mark a turning point for Apple.
3) Tesla (NASDAQ:TSLA)
Elon Musk never ceases to be in the limelight. He has recently sued Open AI and its co-founder. This is likely going to be a tumultuous time for those involved as allegations and counter narratives are being made between both parties, setting up for a potentially uglier situation than the acquisition of Twitter.
Tesla also did not perform well in its 4QFY23 earnings report, dipping 5.6% at the onset. The likely reason for the dip was a lack of firm sales guidance for 2024.
Tesla said growth is going to be substantially below 2023’s level. Tesla shipped some 1.8 million vehicles in 2023, up about 38% YoY. Analysts expects about 2.1 million to 2.2 million units for 2024, up about 20% compared with 2023.
Tesla was a cult product with sticky customers who were not affected by small price changes. Tesla is now constantly competing to retain and gain new market share. Price has become a factor to these new buyers and there is also continued uncertainty on the product mix, price and margins of the vehicles sold.
There are also rumors that layoffs maybe coming in Tesla as Elon looks to trimming costs amidst softening demand for EVs and price and market share wars across key geographical segments.
Which Magnificent 7 laggard is the best buy now?
These three Magnificent 7 laggards are laggards for valid reasons. However, of these 3 laggards, we like Alphabet the most as the business is growing, with topline gains and margin expansion, albeit not as quickly as expected.
At the point of writing, Apple and Tesla have it worse, with concerns over its growth amidst many challenges. In our opinion, the concerns and challenges at hand make Apple and Tesla contrarian plays as it is currently uncertain how both Apple and Tesla intend to regain its former trajectory.