Bank of America analyst Michael Hartnett bestowed the title of “Magnificent 7,” or Mag 7, upon a select group of elite U.S. technology companies that have notably propelled the stock market in recent times. This esteemed group includes Apple (AAPL), Meta Platforms (META) (formerly Facebook), Amazon (AMZN), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), and Tesla (TSLA). These companies have capitalized on the trends in cloud computing, artificial intelligence (AI), electric vehicles (EVs), digital advertising, and other flourishing sectors, solidifying their positions as leaders in the technology industry.
Yet, focusing on the “Magnificent Six,” D.A. Davidson’s managing director and analyst Gil Luria predicts their continued dominance in the tech landscape during the upcoming AI waves. Since the advent of the AI revolution, these tech giants have experienced explosive growth by integrating AI into their core offerings. In a recent interview with Yahoo Finance, Luria expounded on how these tech powerhouses, comprising the original Mag 7 lineup without Tesla, are poised to excel in AI and computing in the years ahead.
While Tesla is typically perceived as a tech entity, Luria diverges from this view, categorizing it primarily as an automobile manufacturer. As for the Mag 7 stocks, Tesla’s performance has lagged this year. Here’s a comparative look at the year-to-date performance of each company against the 17.3% gain of the S&P 500 Index:
Delving deeper into this analysis…
The Future Outlook for Meta Platforms and Alphabet
Luria has initiated coverage on Meta Platforms, designating it as a “buy” with a price target of $600. Meta Platforms is the parent company behind a suite of popular social media platforms, including Facebook, Instagram, WhatsApp, Threads, and others. Approximately 3.2 billion individuals engage with at least one of Meta’s apps daily, as per the company’s data.
Overall, Meta stock garners a “strong buy” rating on Wall Street. Among the 44 analysts covering the stock, 38 advocate a “strong buy,” one recommends a “moderate buy,” three suggest a “hold,” and two rate it a “strong sell.”
Meta’s revenue is heavily reliant on its social media platforms, which contribute nearly 99% to its total revenue within the Family of Apps (FoA) segment. The FoA segment witnessed a 22% revenue surge in the second quarter. Moreover, its Reality Labs (RL) arm, encompassing AR and VR technologies, saw a revenue uptick of 27.9%, bolstered by AI-driven Quest headsets. Notably, Meta’s overall revenue climbed by 22%, while diluted earnings surged by 73% during the same quarter.
With a robust financial position, Meta is channeling substantial investments into AI to fortify both the FoA and RL segments. The metaverse arena presents ample growth possibilities for Meta propelled by AI.
Analysts foresee a 42.9% earnings surge in 2024 and a 14.8% uptick in 2025 for Meta. The mean target price stands at $575.93, projecting a 9.6% upside potential over the next 12 months.
Luria also initiated coverage on Alphabet, Google’s parent company, affording it a “neutral” rating alongside a $170 price target. On the broader market spectrum, GOOGL stock is a “strong buy.” Among the 44 analysts analyzing the stock, 34 champion a “strong buy,” three recommend a “moderate buy,” and seven assert a “hold.” The mean target price of $204 signifies a potential 32% ascent in the next year.
Besides Google Search’s supremacy in the search engine realm, Google Cloud is a key contributor to Alphabet’s growth. Search accounted for 57% of the total $84.7 billion revenue in the second quarter. Total revenue surged by 13.5%, with adjusted earnings climbing by 31.2% to $1.89 per share in the same period.
Alphabet has seamlessly integrated AI into all its flagship products, leading to extraordinary growth in recent quarters. The company reports that roughly 2 million developers are presently leveraging its AI infrastructure and generative AI solutions tailored for cloud clientele.
CEO Sundar Pichai underscored the company’s commitment to innovation across every layer of the AI framework, from chip technology to agents and beyond. Analysts following Alphabet anticipate a 31.5% earnings growth in 2024 and a 14.0% expansion in 2025.
Luria has encompassed Meta and Alphabet in his “compute sector” coverage alongside the remaining Mag 6 stocks. As per the analyst, “these six companies will persist in their dominance in AI and spatial computing, broadening their lead from their existing sectors – desktop and mobile computing, cloud computing and advertising, computing.” These sectors demand “scale, reach, and capital,” qualities which these six tech behemoths notably possess.
Dissecting the Analyst’s Bearish Stance on Tesla
Despite being an EV giant with the essential attributes of “scale, reach, and capital,” Tesla is viewed by Luria primarily as an automotive firm. Automobiles represent approximately 90% of its revenue and profits, leading Luria to exclude Tesla from the Mag 6 cohort projected to dominate the technological realm in the forthcoming AI waves.
It is worth noting that Tesla has diversified beyond EVs into energy storage, solar power, and automation. Nevertheless, the automotive domain accounts for 78% of total revenue, and in recent quarters, this segment has encountered challenges.
In Q2, revenue in the automobile sector plummeted by 7%. Fierce competition in the EV industry, alongside other macroeconomic influences, has compelled Tesla to slash prices, exerting pressure on profit margins. While CEO Elon Musk anticipates this as a transient issue, Tesla’s growth trajectory is unlikely to parallel that of the other tech giants amid the impending AI waves.
Overall, Tesla stock carries a “hold” rating on Wall Street. Of the 36 analysts scrutinizing TSLA, 10 endorse a “strong buy,” one opts for a “moderate buy,” 18 label it a “hold,” and seven recommend a “strong sell.”
Tesla stock has surpassed its average price target of $198.29. A Street-high estimate of $310 hints at a possible 34.8% surge in the next 12 months.
For additional Stock Market News from Barchart
