All the Magnificent Seven broke records last year, outperforming both the Nasdaq Composite and the S&P 500. This exceptional feat led Bank of America analyst Michael Hartnett to christen this elite group, consisting of Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla (NASDAQ: TSLA). However, the tides have drastically shifted in 2024.
Alphabet, Apple, and Tesla are lagging behind, with Apple witnessing an over 8% decline in its value year to date. Tesla, in particular, has been under intense scrutiny within the Magnificent Seven, plummeting over 30% in less than three months, earning the dubious title of the worst-performing S&P stock this year. Even Boeing, grappling with its own maintenance crises, manages to fare marginally better than Tesla.
Meanwhile, Nvidia emerges as the star performer in the S&P 500, securing the top spot, with Meta Platforms following closely in third place.
Unraveling the Market Dynamics
In 2022, the Nasdaq Composite and numerous tech giants weathered a severe inflation-induced sell-off as recession anxieties spread like wildfire. 2023 breathed a sigh of relief as inflation began easing, paving the way for potential rate cuts by the Federal Reserve.
The advent of ChatGPT heralded a new market narrative centered around artificial intelligence (AI). Although AI is not a recent concept, the proliferation of AI tools in workplaces and daily routines has injected fresh excitement into the market.
Wall Street often fixates on trending themes, sometimes disregarding opportunities outside the prevailing framework. Companies within the Magnificent Seven tapping into AI and laying out clear strategies to leverage AI for earnings growth have reaped substantial rewards. Conversely, firms like Apple and Tesla, lacking a well-defined AI roadmap, faced repercussions in the market.
Deciphering the Monetization Conundrum
My observation indicates that companies with superior AI potential prioritize business-to-business sales over business-to-consumer transactions.
Alphabet, Meta Platforms, and Microsoft primarily deal in software and digital ads. While Meta Platforms’ social media platforms cater to consumers, the revenue flows predominantly from ads aimed at businesses. Nvidia supplies physical products (computing power essential for intricate AI models) to enterprises.
Amazon’s e-commerce division relies on consumers, but its Amazon Web Services constitutes a cloud infrastructure giant, a cornerstone of the business.
In contrast, Apple and Tesla center their revenue around physical product sales – iPhones for Apple and electric vehicles (EVs) for Tesla. Monetizing AI through consumer product sales proves notably challenging. While exceptions exist, this challenge persists amid the AI upsurge.
Ultimately, Tesla lacks a clear strategy for short-term AI monetization. Its best prospects hinge on long-term ventures like fully autonomous driving and robotaxis, realms still fraught with uncertainty.
Apple similarly grapples with an unclear AI trajectory. While AI integration into future devices seems plausible, the company’s substantial growth lies in its high-margin services division. However, Apple and Tesla have yet to harness AI effectively, a trend likely to endure given their business models.
Analysts foresee minimal growth for Apple in the near term, reflected in its nearly equivalent price-to-earnings ratio and forward P/E. Tesla exhibits a lower forward P/E, signaling negative growth projections.
