The Magnificent Seven – remember how it ended
In our latest Shard Capital podcast, Market Strategist Bill Blain interview’s US-Equities Analyst, Julian Wheeler on the Magnificent Seven US Mega Cap Tech stocks and compares them to the fate of the characters from the original American Western action movie from 1960.
The Magnificent Seven contributed roughly 60% to the S&P 500’s gains in 2023, according to Forbes. With 6/7 earnings reports announced so far this year, Julian shares his predictions of each of the Magnificent Seven stocks and where he believes they are heading.
WARNING – Spoiler alert for those who still wish to see The Magnificent Seven movie.
Listen in on the conversation below:
Recorded 6th February 2024
Full Article – updated 11th February 2024
Julian Wheeler, Partner at Shard Capital
Anyone who remembers the film ‘The Magnificent Seven’ will know that not all of the characters survived and that a heavy price was paid to reach a happy ending. With this in mind, smart investors should take their time to decide which of the stocks currently bearing the Magnificent Seven moniker will ride off into the sunset with a tidy return – and which ones will be left in the dust.
For those who have not seen the movie but intend to do so – beware spoilers!
The first of the seven to be killed is clearly Tesla; currently down over 20% in 2024 as reality dawns that perhaps this should be valued like a car company after all, subject to the normal forces of supply and demand. That makes Tesla the equivalent of Harry Luck (Brad Dexter) who, having ridden away from the group before the final battle, returns in a show of loyalty and, whilst rescuing several comrades, gets shot for his troubles. He died given the false assurance that they were really fighting over some non-existent gold; an appropriate analogy for Tesla I feel.
Second to fall, I suggest, will be Apple which makes it Lee (Robert Vaughan), the very smooth gambler who lost his nerve. He pulled himself together at the last minute, but there was still a bullet with his name on it. Apple is not suffering from a loss of nerve, but of momentum in its most important product and biggest growth market, China; since this became clear the stock has lagged and this new Vision Pro headset will not rescue them any time soon. Why pay that multiple for minimal growth when Apple also faces risks to its business from both regulators and geopolitics?
Also shot down following its lacklustre earnings was Google. For me they represent Bernardo (Charles Bronson), a good fighter but, facing overwhelming odds, he was killed near the end of the shootout. My problem with Google is that they have everything to lose and little to gain from a change in the status quo to the digital advertising market. From being the only company in Search, Microsoft has a second chance with the emergence of Chat GPT and in short form video, there used to only be YouTube; now they compete with Facebook’s Reels, Instagram, Tik-Tok and Snapchat. Meanwhile Netflix, Amazon and Disney now want a share of the advertising pie too. Yes, Google is growing in Cloud, but very much the 3rd player and by their own admission, when it comes to AI Language Models “we have no moat, neither does Open AI”. To catch Microsoft, they are now embarking on a massive increase in Capex which surely means lower margins.
As we move on it is getting harder to match the stocks to the film, which needs a fourth and final dead Cowboy. However, in the role of knife throwing Britt (James Coburn) who also fails to come out alive, I am leaning towards Microsoft due to its valuation and consensual overweight among investors and analysts. The reason is twofold: first, expectations for the success of CoPilot (their AI product) are sky high and I suggest are now well priced into the shares and second, Google is not going down without a fight. I see the equivalent of another gunfight breaking out here, which would tend to hurt them both and will only be to the benefit of the arms dealer: Nvidia.
So now to the survivors:
Nvidia is Vin (Steve McQueen) who rode away with Yul Brynner at the end of the film. Their GPUs (although as there’s no graphics involved with AI, they’re becoming known simply as “Accelerators”) that used to run game consoles and then mined Crypto, now work to train Large Language Models. Currently the sky is the limit on growth, as long as the other members of the Magnificent Seven keep spending on AI; which is exactly what they will do at an increasing rate. As a result, for now Nvidia gets cheaper each quarter and trounces expectations, because the analysts incorrectly keep fading the growth of the classic ‘S’ curve too early. Ah, but is it in the price of the stock? That is becoming harder to say of course, as it rises daily, but there will be plenty of willing buyers of any correction and it is still not trading at the crazy prices companies such as Zoom reached during the pandemic.
Amazon will live on and somehow you feel it should, given that it is a more diverse collection of businesses anyway. More stable than the rest perhaps, they are running the divisions better now (not burning $10bn a year on things like Alexa), margins are improving after the downturn last year and they will grow advertising through its introduction on Prime Video. Therefore Amazon is Chico, the youngest of the Seven, who stays on in the village, settles down and hangs up his gun belt.
Which leads us to the final cowboy – the leader of the Magnificent Seven was Chris (Yul Brynner) and that is Meta. You’ll have to take my word for it, but I thought this before they put out numbers and went up 20% in a day! That is why it is the largest position in my US model portfolio. Why? Because their approach to AI is to promote an open source model, which being free, should triumph in time. Value is accruing to the largest ‘walled gardens’, shown in the fact that both Snapchat and Pinterest are falling behind and Meta itself will see the greatest return from an AI rollout at the company; 25% less people and wildly more profitable. As of the end of January, you could have 3 Meta for every 1 Apple – that’s a no-brainer trade for me. Buy dips on Meta, Sell rallies on Apple.
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