Has the Magnificent 7 become the Magnificent 1?

Has the Magnificent 7 become the Magnificent 1?

March 25, 2024

Last year, only seven stocks—Apple, Microsoft, Nvidia, Alphabet, Meta, Amazon, and Tesla, about one third of the S&P 500 by weighting, contributed two thirds of the S&P 500’s 26% return—double what back-of-the napkin math suggests they should. It had investors coming into 2024 asking “Will this continue?”, or more accurately, “Can this continue?” 

Roughly three months into 2024, the answer is emerging. While the S&P 500 is certainly off to a strong start, gaining ~10% YTD, collectively, those seven stocks are not powering market returns the way they did in 2023.

For one thing, two of the stocks—Apple and Tesla—are each firmly down YTD, hurting S&P 500 returns, not helping it. Google has struggled to maintain positive YTD 2024 gains. New names have emerged like Eli Lilly, Berkshire Hathaway, and Broadcom. Of the 2023 “Magnificent 7” stocks, only one truly stands out in 2024—Nvidia.

After gaining an incredible 290% last year, NVDA has tacked on another 90% gain so far in 2024. In fact, Nvidia alone has contributed nearly one third of the gains in the S&P 500 index year to date. For reference, last year the strongest Mag 7 names each contributed ‘only’ one tenth of the S&P’s gain. After this incredible run, NVDA now has a market cap of $2+ trillion dollars and is only the third company in history to cross that threshold (Microsoft and Apple being the others).

 

Source - MorningStar

 Source - MorningStar

Why has NVDA’s stock done this? No surprise here—the rise of Artificial Intelligence. The technology had been kicking around Silicon Valley for a long time, but past AI efforts always seemed to disappoint or were overshadowed by things like the metaverse, electric vehicles, blockchain technology, or even quantum computing. Everything changed in late 2022 when ChatGPT was released to the world, demonstrating that AI could do some amazing things. How? A software modeling approach called large language modeling powered by high-end specialized hardware—namely Nvidia’s GPUs. As it became clear to investors how indispensable these chips were, the rally in NVDA stock began.

The 500%+ rally in Nvidia stock since late 2022, while eyebrow raising, has not just been hype. Quarterly financial results have provided the foundation for it. For example, in Q4 2022, Nvidia’s quarterly revenue was around $6b but by Q1 2024 it had jumped to ~$22b. Quarterly profits in that same time went from $1.8b to $14.5b. By the end of this year, quarterly profits are expected to grow to $19b and annual profits are ultimately expected to reach $100b in the not-too-distant future. What does this mean? It means that despite parabolic moves in the stock it is still is not particularly expensive. Nvidia’s P/E ratio using the next twelve months earnings is around 36x. If you calculate it using 2025 earnings that ratio falls to the mid-20s. For context, this compares to the S&P 500 forward P/E ratio of 21x. Tech- heavy indexes like the Russell 1000 Growth and the NASDAQ are both around 27x—lower but not dramatically different from NVDA. Compared to the other Magnificent 7 names, NVDA’s forward P/E is middle of the pack. Finally, for those concerned about a repeat of the dot-com bubble, it is worth noting that the NASDAQ peaked at a 175x multiple back in 2000. Let me be clear—NVDA is not ‘cheap’, but it is lower than one may have guessed given its near vertical stock chart.

So where does Nvidia go from here? In the short-term it appears probable that demand for Nvidia GPUs will continue to increase. Nvidia management and their customers have clearly communicated this. This GPU demand should continue to underpin strong financial results. Longer-term, no one knows how the Artificial Intelligence gold-rush will play out. AI holds incredible promise, but it is still too early to gauge how large and lasting its impact will be. That said, investors should take some comfort that despite this huge potential, it does not seem the market has become irrationally exuberant about it.

 

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.