The "Magnificent Seven" companies caught the market by storm in 2023 for their market-crushing gains. But the group has showed signs of cooling off.
Nvidia (NVDA -0.79%), Alphabet (GOOG 0.23%) (GOOGL 0.23%), and Amazon (AMZN -1.61%) are the only three Magnificent Seven stocks that are outperforming the Nasdaq Composite (^IXIC -0.01%) over the last three months.
Here's why each of the three is doing well, whether these stocks are buys, and how to approach investing in the Magnificent Seven right now.
Image source: Getty Images.
1. Nvidia
Like any stock that has run up fast, Nvidia is one that investors have mixed feelings about. Some might think it is a bubble waiting to pop, while others believe it is on the bleeding edge of artificial intelligence (AI). But so far, the story has been led by fundamentals, which suggests that Nvidia could keep running higher.
Sustained rapid growth can justify even the most sky-high valuations. Especially if a company can double earnings in a single year. That's exactly what analysts are expecting from Nvidia, with consensus estimates on 2025 earnings per share (EPS) of $24.87, and $31.54 for 2026.
For context, the company made $11.93 in fiscal 2024 EPS and reported its full-year fiscal 2024 earnings on Feb. 21.
The jump from fiscal 2024 to fiscal 2025 looks promising, but there is concern that growth could cool in fiscal 2026. Still, if Nvidia notches $31.30 in fiscal 2026 EPS, that would give the stock a price-to-earnings (P/E) ratio under 29 based on the current price.
That's a compelling valuation for a high-growth market leader in the early innings of the AI evolution. But it's also based on figures we won't see for nearly two years.
We'll get a better idea of how Nvidia is progressing toward these targets when it reports first-quarter fiscal 2025 earnings on May 22. As long as the growth is there, the stock could continue being a market winner. But if the narrative changes, even due to temporary factors, the stock could take a major hit.
2. Alphabet
In late February, Alphabet was the only Magnificent Seven stock with a cheaper valuation than the S&P 500. But that didn't last long.
It has been one of the hottest tech stocks as of late and went from out of favor to making a new all-time high.
Alphabet achieved phenomenal results in its recent quarter and announced its first dividend in company history. But it's not like the results were relatively better than peers like Meta Platforms.
Rather, the stock was being held back due to AI-related blunders and a view that it didn't have the innovation of a peer like Meta Platforms that has done a masterful job of monetizing AI to improve product performance and its bottom line.
Alphabet is still looking to bring something new to the AI table. The recent run-up has more to do with strength from its legacy businesses like Google Search, Google Cloud, YouTube, and Android and a reminder that Alphabet is a cash cow with a ton of dry powder to reinvest in the business, make acquisitions, buy back stock -- and now, pay a dividend.
Alphabet had some catching up to do, and it looks to be fairly priced now. For the next leg higher, I think the company has to show more innovation, but there are some levers it can pull in the meantime to provide value to shareholders.
3. Amazon
Amazon was one of the hardest-hit stocks in 2022, sinking to multiyear lows. Shares were so cheap that there were arguments that Amazon Web Services (AWS) alone was worth at least as much as the whole market cap of the company, which fell below $1 trillion in 2022 and is hovering around $2 trillion today.
Being way oversold helped propel a monster comeback in 2023. But AWS didn't even have a good year in 2023. Now, AWS has turned around, and the rest of the business is doing well, too. Just about everything is going right at Amazon, including cloud computing and domestic and international e-commerce.
The issue is that the stock still isn't cheap, and probably won't be anytime soon. Consensus analyst estimates call for 2024 EPS of $4.54, and $5.76 for 2025 -- giving Amazon a huge 32.5 P/E ratio based on 2025 earnings.
Some investors might prefer to value the company based on price-to-sales (P/S) instead of P/E since it spends so much money reinvesting in the business and books far lower earnings than it could if it were more conservative. For 2024, analyst consensus sales estimates are $638.2 billion, and $708.7 billion for 2025, which would give Amazon a P/S ratio of 2.75 based on 2025 figures. From that perspective, Amazon is more reasonably priced.
AMZN PS ratio data by YCharts.
The glass-half-full outlook would say that it deserves a higher P/S today than in the past because each dollar of sales is of higher quality. To an extent, that's true because AWS is making up a larger share of the company's revenue, and AWS is a high-margin cash cow that drives the profitability of the broader business.
For context, AWS generated $9.4 billion in operating income in the first quarter of 2024 on $25 billion in sales, compared to $5.1 billion from $21.4 billion in sales a year earlier. AWS still only made up about 17.5% of total Amazon sales in the recent quarter. But it was a much smaller share of the business just five years ago, whereas today, it can help move the top line and dominate the bottom line.
There's certainly a buy case to be made for Amazon, even after its recent run-up. But it doesn't have Nvidia's growth, and yet it is still an expensive stock, even based on estimates over a year into the future.
Buying a top stock for the right reasons
It's important to understand that sentiment and context can have just as much impact on a stock's short-term performance -- if not more -- than the fundamentals.
As a long-term investor, it can be helpful to know what is driving a stock's price to determine if it is a good value or if a lot of the expected growth is already priced in.
The story is out on Nvidia. The projections are so lofty that the company has to put up unbelievable results just to look like a good value. But so far, it has lived up to the hype.
Alphabet is an excellent example of a company that made no significant changes but saw its stock price shoot up once investors were reminded that the strength of its core business outshines any AI snags.
Meanwhile, Amazon had sold off far too much for such a high-quality business. The growth is excellent, but the valuation is a lot higher today.
There's a variety of reasons the other four Magnificent Seven are underperforming over the last three months. But as a generalization, I'd say that Microsoft and Meta Platforms have raised the bar so high (and both stocks have crushed the Nasdaq Composite over the last year and a half) that it's hard to blow expectations out of the water.
Meanwhile, Apple and Tesla are facing slowing growth, a bad look relative to their better-performing megacap peers.
Expectations are everything to investors. If Apple and Tesla return to growth, it would be easier for those stocks to impress. But the degree of uncertainty with that prospect is why both stocks are out of favor.
By comparison, Nvidia is a darling that is already expected to keep growing. And as we saw with Microsoft and Meta in their recent earnings, a company can keep growing at an impressive clip, but it still might not be enough to move the needle.
The simplest way to approach the Magnificent Seven is to go with the company or companies you think have the best chance of growing or blending growth and value over at least the next three to five years rather than jumping in and out of whatever is working in a matter of months.
