What Makes These 7 Stocks Magnificent?

July 08, 2024 at 09:00 AM EDT

Imagine showing two white dice, one with one black dot, one with six black dots, on a sheet of paper listing Global investments Coined by Bank of America’s chief investment strategist Michael Hartnett, the Magnificent 7 is a group of seven technology companies known for their significant market capitalization and impact on global markets. The Magnificent 7 currently includes e-commerce giants Amazon.com and Alphabet, consumer tech providers Apple and Microsoft, EV leader Tesla, semiconductor manufacturer NVIDIA, and social media powerhouse Meta.

Investors have been particularly interested in the Magnificent 7 since the onset of the Covid-19 pandemic when tech stocks experienced sudden surges in value that outpaced the general market. This trend continues today, with each of the stocks on this list providing solid returns throughout the 2023 and 2024 fiscal years. Read on to learn more about what makes the Magnificent 7 stocks unique and the pros and cons of investing in them.

History and Evolution of the Magnificent 7 Stocks

You might already be familiar with FAANG stocks, the grouping of Facebook (now Meta), Amazon.com, Apple, Netflix, and Google's parent company, Alphabet. These tech stocks earned their place on this exclusive list by producing consistently high returns and demonstrating substantial growth over time.

However, as the technology landscape evolved, a new set of dominant players emerged. The Magnificent 7 stocks have consistently outperformed indexes like the S&P 500 due to their large influence and position. According to Hartnett, these companies “have monopolistic/oligopolistic positions, pricing power, secular earnings power, balance sheets that can finance AI and so on,” making them potentially stronger long-term holds for investors interested in the future of tech.

An Overview of Each Magnificent 7 Stock

Each of these seven publicly traded tech-focused or tech-adjacent stocks are top performers in their respective industries.

Apple

Apple (NASDAQ: AAPL) is one of the world’s largest designers and manufacturers of consumer technology products, including smartphones, tablets, and computers. Apple’s total market capitalization was more than $3.71 trillion in June of 2024, making it one of the most valuable companies trading on the Nasdaq exchange and a major component of indexes like the S&P 500 and the Nasdaq-100.

As of June 2024, AAPL stock had a five-year total return of 321.54%, a projected 1.6% price increase target, and a Moderate Buy rating by analysts.

Microsoft

Consumer tech giant Microsoft (NASDAQ: MSFT) is best known for Windows, the most commonly used operating system for personal computers, and Microsoft Office, which provides a host of both B2B and B2C SAAS options. The company has been a favorite choice for investors looking to broaden their exposure to artificial intelligence (AI), and Microsoft's $19.7 billion acquisition of Nuance Communications in 2021 underscores its commitment to AI.

As of June 2024, Microsoft held an analyst rating of Moderate Buy and boasted a $3.35 trillion total market capitalization, making it a blue-chip option for tech investors.

Alphabet

Alphabet (NASDAQ: GOOGL), the parent company behind the popular search engine Google, is one of the world’s most prolific internet service and product providers. Alphabet's advertising segments also produce significant revenue, especially its social media investments in companies like YouTube and Wildfire Interactive. While the company offers innovative exposure to AI with its Google AI and DeepMind branches, it has also been at the forefront of monopolistic and antitrust concerns.

As of June 2024, GOOGL showed a total market capitalization of $2.27 trillion and an analyst rating of Moderate Buy.

Amazon

The world’s largest e-commerce platform, Amazon.com (NASDAQ: AMZN) connects consumers and manufacturers directly through its massive online shopping infrastructure. Amazon has expanded well beyond its original platform, with ongoing investments in delivery management, cloud computing services, and entertainment through its Amazon Music and Amazon Prime Video segments.

As of June 2024, Amazon had a total market capitalization of more than $2 trillion, with an analyst rating of Buy and a 15% projected upside -- one of the highest in the Magnificent 7.

Meta Platforms

While Meta Platforms (NASDAQ: META) is best known for its flagship product Facebook, the international social media platform provider's umbrella also includes Instagram, Whatsapp, and Messenger. Though it has faced recent challenges related to share price, the company remains highly profitable through its advertising segments.

As of June 2024, Meta maintained a total market capitalization of $1.30 trillion, and analysts rate the stock a Moderate Buy with a 14% projected earnings growth.

NVIDIA

One of the world’s largest producers of semiconductors and microchips, NVIDIA (NASDAQ: NVDA) has made major strides in gaming and graphics development research. The company is focused on graphics processing units, AI, and machine learning products and has plans to grow its auto manufacturing and real-time 3D design collaboration in the future.

As of June 2024, NVIDIA had a total market capitalization of $3.04 trillion, a projected earnings growth of 25%, and an average analyst rating of Moderate Buy.

Tesla

The world’s leading manufacturer of electric vehicles (EVs), Tesla (NASDAQ: TSLA) is also heavily involved in solar energy development, which it aims to incorporate more extensively into its charging infrastructure. In 2022, Tesla began expanding its manufacturing capacity with new gigafactories in Berlin, Shanghai, and Austin. The company is expected to focus on autonomous driving and its solar and energy storage solutions in the future.

As of June 2024, Tesla maintained a total market capitalization of $625.53 billion, giving it the lowest total market share of the Magnificent 7 and an analyst rating of Hold.

Pros & Cons of Investing in Magnificent 7 Stocks

The appeal of the Magnificent 7 is obvious to investors who follow both specific tech stock returns and the returns of the overall market, but investing in them also comes with notable risks.

Pros

The Magnificent 7 stocks offer many compelling reasons to consider adding them to your portfolio, including:

High Returns: Historically, these companies have produced significantly higher year-over-year returns compared to the overall market.
Market Dominance: Holding dominant positions in their fields allows these companies to provide stability and offer the potential for future growth. For example, Microsoft's dominance in software and cloud services and Google's control over online search and advertising contribute to their sustained market leadership and growth potential.
Large Market Shares: These companies control major market shares in their respective industries, creating strong competitive moats. For example, Apple dominates a significant percentage of the smartphone market with its highly popular iPhone and Apple Watch products. The positive feedback loop of customers’ continued investments in their products creates an important, consistent stream of income as well as brand loyalty.
Larger Cash Reserves: Magnificent 7 stocks are blue-chip companies with long histories of profitability. This usually translates to higher cash reserves and less debt, which can increase share longevity during times of economic or consumer stress.
Consistent Innovation: Part of the reason why each of the Magnificent 7 earned their spot on the list is their commitment to innovation. For example, Amazon is a leader in e-commerce and cloud computing, Nvidia is at the forefront of semiconductor research and AI, and Tesla is pioneering electric vehicles. This innovation drives growth and keeps these companies at the forefront of their industries.

Cons

Even the best stocks are not immune to risk. Let’s look at some concerns regarding the Magnificent 7:

Market Volatility: The technology sector's volatility can lead to sharp declines in the stock prices of these companies due to regulatory changes, technological disruptions, or shifts in consumer preferences.
High Investor Expectation: Magnificent 7 stocks often trade at high price-to-earnings ratios, reflecting high investor expectations for future growth. For instance, companies like Amazon and Tesla often have P/E ratios significantly above market averages, which can lead to more significant share price changes if performance results fall short.
Antitrust and Privacy Scrutiny: Due to their market dominance, these companies are often targets of antitrust and privacy investigations. For example, Google and Meta have faced multiple antitrust lawsuits in both the United States and Europe. These companies, especially those that rely heavily on advertising, also routinely face fines and scrutiny related to browsing and data privacy.
Concentration Risk: Heavy investment in these stocks can lead to a lack of diversification, increasing investors’ vulnerability to sector-specific downturns and company-specific issues.
Overvaluation: Given their popularity and strong historical performance, these stocks can become overvalued. If the market corrects or growth slows, investors might face lower returns or even losses, as the high valuations may not be sustainable in the long run.

Future Outlook for the Magnificent 7 Stocks

Overall, the Magnificent 7 are likely to remain pivotal players in the global economy in the future. As major components of indexes that span both the Nasdaq and the NYSE, Magnificent 7 stocks are cemented in positions of industry dominance. These companies are expected to continue leading in key areas such as AI, cloud computing, and electric vehicles -- driving future growth and maintaining their dominance. As they invest in cutting-edge technologies and expand their influence, their potential for long-term success appears robust. However, regulatory scrutiny, potential overvaluation, and inherent market volatility will continue to be ongoing risks for these stocks.

Investing in the Magnificent 7

You can gain exposure to these stocks with direct investments in the Magnificent 7 companies or through a tech ETF. The Technology Select Sector SPDR ETF (NYSE: XLK) and the Vanguard Information Technology ETF (NYSE: VGT) both hold large positions in the Magnificent 7, providing you with instant diversification across these market makers.

While their market dominance positions them as a less volatile alternative to mid-cap tech stocks, it’s important to remember that the Magnificent 7 are still dependent on the technology industry as a whole—which, on average, experiences more volatility than sectors like consumer staples. For investors approaching retirement or with a lower risk tolerance, this may make individual Magnificent 7 stocks less appealing than a tech-focused index fund.

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