Unpredictability and volatility have been the name of the game on Wall Street since this decade began. Not surprisingly, investors have turned their attention to industry-leading businesses that have a history of outperforming no matter what Wall Street throws their way. While this exclusive group had previously been limited to just five components (the FAANG stocks), investors have expanded their horizons and welcomed the "magnificent seven" with open arms.
When I say "magnificent seven," I'm referring to the following seven standout businesses:
- Apple (AAPL -0.69%)
- Microsoft (MSFT 0.59%)
- Alphabet (GOOGL -0.77%) (GOOG -0.75%)
- Amazon (AMZN -1.07%)
- Nvidia (NVDA 1.27%)
- Tesla (TSLA -2.04%)
- Meta Platforms (META 0.16%)
Over the trailing decade, these seven stocks have run circles around the benchmark S&P 500.
Image source: Getty Images.
What's more, they offer well-defined competitive advantages, if not insurmountable moats. For instance, Alphabet's internet search engine, Google, has accounted for at least 90% of monthly global internet search share for the past eight years. Meanwhile, electric vehicle (EV) manufacturer Tesla is the overwhelming share leader in North America, as well as the only pure-play EV producer that's generating a profit.
The outperformance of the magnificent seven, coupled with their abundant competitive advantages, hasn't been lost on Wall Street's smartest money managers. Based on the latest round of Form 13Fs, billionaires bought three magnificent seven stocks hand over fist during the June-ended quarter.
Nvidia
The first of the magnificent seven stocks that billionaires absolutely piled into in the most recent quarter is none other than artificial intelligence (AI) kingpin Nvidia. It's usually impressive when around a half-dozen prominent billionaire money managers buy shares in an industry leader. Nvidia had 11 billionaires buying its stock during the June-ended quarter (number of shares purchased in Q2 in parenthesis):
- Jeff Yass at Susquehanna International (5,401,204 shares)
- Jim Simons at Renaissance Technologies (1,852,712 shares)
- Israel Englander at Millennium Management (1,023,518 shares)
- David Tepper at Appaloosa Management (870,000 shares)
- Steven Cohen at Point72 Asset Management (662,385 shares)
- Stephen Mandel at Lone Pine Capital (641,649 shares)
- David Siegel and John Overdeck at Two Sigma Investments (629,072 shares)
- Chase Coleman at Tiger Global Management (584,700 shares)
- Dan Loeb at Third Point (500,000 shares)
- Ole Andreas Halvorsen at Viking Global Investors (312,400 shares)
As noted, AI is Nvidia's core driver. Nvidia is expected to account for up to 90% of AI-driven graphics processing units (GPUs) being deployed in high-compute data centers. Demand for its A100 and H100 GPUs has afforded Nvidia exceptional pricing power at a time when high-compute GPU production is somewhat constrained. As a result, Nvidia has reported two absolute blowout quarters, in terms of data-center sales, in a row.
The wildcard here is that no one is exactly certain how much AI will contribute to U.S. and global gross domestic product, or what utility AI will serve in various industries. The euphoria of not wanting to miss out on AI uptake is what's fueling Nvidia's pricing power and AI-GPU demand in data centers.
But to be a bit of a party pooper, I'll also remind investors that every next-big-thing investment over the past 30 years has gone through an initial bubble. This isn't to say that next-big-trends don't eventually succeed. Rather, it's to point out that investor expectations often outpace realized demand, at least initially. The simple fact that Nvidia's costs have remained stable as sales have soared suggests the company is generating most, if not all, of its gains from increasing its prices and not from volume. That's a bit worrisome given that competition is ramping up.
Likewise, Nvidia's valuation has, arguably, gotten out of hand. Investors are currently paying around 96 times cash flow for a company that ended four of six years from 2013 through 2018 with a cash-flow multiple between 11 and 20. Outsize moves higher like we've seen from Nvidia are rarely sustainable.
Microsoft
A second magnificent seven stock that Wall Street billionaires simply can't get enough of is tech stock Microsoft. The second quarter saw seven billionaire money managers take the plunge (number of shares purchased in Q2 in parenthesis):
- Israel Englander of Millennium Management (2,534,025 shares)
- Philippe Laffont of Coatue Management (2,135,750 shares)
- Ken Griffin of Citadel Advisors (2,041,023 shares)
- Jeff Yass of Susquehanna International (1,742,377 shares)
- Steven Cohen of Point72 Asset Management (1,373,840 shares)
- David Tepper of Appaloosa Management (980,000 shares)
- Dan Loeb of Third Point (470,000 shares)
The "why" behind these seven big-time buys likely has to do with the predictability of Microsoft's operating cash flow, the rapid growth of its cloud operations, and its balance sheet.
Though most investors are interested in Microsoft's fast-growing cloud operations, I'm quick to remind folks not to overlook old-school segments like Windows OEM or office consumer. These may not be fast-growing divisions ever again, but the Windows operating system is still dominant on global desktops. The juicy margins Microsoft generates from selling its software provides boatloads of highly predictable cash flow that the company can use to invest in faster-growing initiatives.
With regard to cloud, Microsoft appears to be firing on all cylinders. Azure is the world's No. 2 cloud infrastructure service provider. According to tech analysis company Canalys, it accounts for 26% of global cloud infrastructure service spending, which suggests it's gaining ground on Amazon, whose Amazon Web Services is currently No. 1 in the world. Even with growth "slowing," Azure still managed 27% currency-neutral sales growth in the fiscal fourth quarter, ended June 30.
There's also Microsoft's immaculate balance sheet. The company closed out its fiscal year with a little over $111 billion in cash, cash equivalents, and marketable securities, compared to just a tad over $47 billion in long-term debt. Microsoft is such a cash-flow machine that it's able to take chances via innovations and acquisitions that few other companies can afford.
Image source: Apple.
Apple
The third magnificent seven stock that billionaires have been buying hand over fist just happens to be the largest publicly traded company, Apple. A grand total of six highly successful billionaire fund managers bought shares of Apple during the second quarter (number of shares purchased in Q2 in parenthesis):
- Jim Simons at Renaissance Technologies (4,912,234 shares)
- David Siegel and John Overdeck at Two Sigma Investments (1,003,490 shares)
- Israel Englander at Millennium Management (559,040 shares)
- David Tepper at Appaloosa Management (480,000 shares)
- Ken Fisher at Fisher Asset Management (417,648 shares)
Similar to Microsoft, the prevailing theme with Apple is consistency. It's widely considered to be the most valuable brand in the world, and it has a very loyal customer base. Apple has generated around $113 billion in operating cash flow over the trailing-12-month period and has relied on innovation to drive its sales and profits higher for more than a decade.
Billionaire investors (ahem, Warren Buffett) are likely enamored with Apple's capital-return program, too. Since commencing its aggressive share-repurchase program in 2013, Apple has bought back approximately $600 billion worth of its common stock. This mammoth buyback program is meaningfully reducing its share count and helping to boost its earnings per share.
But even with billionaires clearly throwing their support behind the largest publicly traded company in the United States, there's a big reason to be skeptical: Apple has completely shifted into neutral in the growth department. With the exception of its high-margin services segment, all of Apple's physical products could see their sales decline in fiscal 2023 (ending Sept. 30).
One of the key selling points of Apple for investors has always been its stellar growth rate. But with sales and profits expected to shift into reverse (albeit by a low-single-digit percentage) in fiscal 2023, Apple's valuation is quite pricey. Living up to investor expectations in the coming quarters may prove difficult.
