Investors who harbored shares of the vaunted “Magnificent Seven” stocks in 2023 basked in the glow of a winning year. This exclusive cohort of mega-cap tech stocks, which includes Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), Tesla (NASDAQ: TSLA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Meta Platforms (NASDAQ: META), and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), outperformed the broad market despite the Nasdaq Composite surging over 45%.
If it isn’t broken, it is popularly advised to avoid fixing it, right? Well, not exactly. An inspection of the figures indicates that a few of these genuinely marvelous stocks may soon lose momentum. Here are the four stocks within this group that deserve a place in 2024’s portfolio and the three to forgo from 2023.
A Closer Look at Nvidia
Nvidia’s chips, tailored for demanding, high-compute applications, have emerged as a linchpin in the artificial intelligence (AI) breakthrough. As much as 90% of the market for AI chips is under the firm’s control, propelling the business to unparalleled heights and accelerating revenue growth to 200% year over year in its most recent quarter, reaching $18 billion.
NVDA PE Ratio (Forward) data by YCharts
The unyielding demand for AI suggests bountiful growth prospects for Nvidia, with analysts anticipating a 42% annual earnings expansion over the coming years, conceivably justifying the stock’s valuation at 40 times 2023 profits. At a PEG ratio of just 1, the stock remains appealing despite its staggering 250% rise in 2023.
Apple: A Cautionary Tale
Not every “Magnificent Seven” company has kept pace with its stock. Apple’s revenue has dwindled over the past year, with net income merely edging up 1%. The cyclicality of Apple’s business, fluctuating with pivotal iPhone releases, can lead to complications when stock prices and operating results move in opposite directions.
AAPL PE Ratio (Forward) data by YCharts
Analysts have diminished their growth projections for Apple in the foreseeable future. With a PEG ratio over 3, backed by over 29 times 2023 earnings, purchasing Apple at its current level presents a tough conundrum for investors. It’s best to await a more sensible pricing scenario.
Meta Platforms: A Diamond in the Rough
In 2022, Wall Street exhibited skepticism towards Meta as the company grappled with a decelerating advertising business, adversarial privacy adjustments to iPhones, and costly metaverse projects that bore no return on investment. Share prices tumbled to $89 until CEO Mark Zuckerberg steered the ship back on course by paring expenses, navigating through the iPhone challenges, and reinstating revenue growth and profits back on track.
META PE Ratio (Forward) data by YCharts
Surprisingly, the stock is still appealing at a mere 25 times 2023 earnings, with anticipated 20% average annual growth in the future. It transpires that Meta continues to be a robust business, a fact neglected by Wall Street in a considerable manner. Although the 2023 upsurge countered the pessimism, there is still ample room for the growth Meta may attain in 2024 and beyond.
Microsoft: An Uneasy Proposition
ChatGPT was the talk of the town in 2023, and Microsoft promptly dived in, hitching its wagon to its creator, OpenAI, through a multibillion-dollar investment and an extensive partnership. With enterprise software, cloud computing, gaming, and more in its arsenal, Microsoft ranks among the world’s largest and most diversified technology companies. Its positioning in the cloud amid the AI opportunity seems to have elevated analyst expectations for its future earnings growth.
MSFT PE Ratio (Forward) data by YCharts
Double-digit growth is not to be dismissed, but designating Microsoft a growth stock at its monumental $2.8 trillion
Stock Picks: Evaluating Top Performers and the Undergrowth
Amazon’s Enduring Value
E-commerce and cloud leader Amazon is holding strong with a compelling PEG ratio, slightly surpassing Microsoft in this metric. The company’s unique strategy of reinvesting its profits back into the business may understate its real profit potential. Despite trading at 57 times its bottom-line earnings, the stock trades at a mere 22 times its operating profits, showing promise for future gains.
AMZN PE Ratio (Forward) data by YCharts
Amazon’s dedication to various undertakings, including the development of AI technology, is a clear indicator of its future potential. Moreover, with e-commerce constituting just 15% of U.S. retail, the company has substantial room for growth over the coming decades.
Tesla’s Dilemma
Tesla, the electric vehicle and energy company, has employed a risky tactic of price reductions to spike unit sales. While this approach is anticipated to enable Tesla to lower prices and eliminate competition, it has sparked short-term challenges in its operating results. The consequence is evident in Tesla’s gross profit margin, experiencing a 22% decrease over the past year.
TSLA PE Ratio (Forward) data by YCharts
Analysts have significantly reduced their expectations for Tesla’s future earnings growth due to the repercussions of the price cuts. As a result, the stock’s PEG ratio has exceeded 4. Consequently, investors might want to exercise prudence and wait for the numbers to validate Tesla’s price-cutting strategy before considering an investment.
Alphabet’s Lucrative Outlook
Alphabet, empowered by Google and YouTube, has overshadowed its behind-the-scenes AI potential. The company leverages AI to optimize customer ad spending on its platforms, predominantly driving its revenue. Moreover, it consistently reduces outstanding shares and intertwines this approach with substantial growth projections, making it a valuable prospect for long-term investors with a modest PEG ratio of 1.4.
GOOGL PE Ratio (Forward) data by YCharts
The combination of Alphabet’s growth potential and stock buybacks has led analysts to anticipate earnings to compound at over 17% annually. Despite a 57% surge in its stock in 2023, it remains a compelling investment with its current valuation.
Conclusion
As investors navigate the tumultuous landscape of stock investments, it’s crucial to approach each opportunity with a discerning eye. While certain industry behemoths maintain strong potential for prosperous returns, caution should be exercised for those navigating a more volatile trajectory. The market’s zooming trajectories may seem alluring, but astute investors understand the virtue of patience.
