After enduring a lengthy bear market, technology stocks came roaring back last year, led by the so-called "Magnificent Seven" stocks. These industry leaders were among the top gainers in the Nasdaq Composite in 2023, helping lift the tech-heavy index out of the doldrums, with the group generating gains of more than 111%, on average.
Here's how members performed in 2023:
- Nvidia (NVDA -0.24%)-- Up 239%
- Meta Platforms (META -2.56%)-- Up 194%
- Tesla -- Up 102%
- Amazon (AMZN 0.74%) -- Up 81%
- Alphabet -- Up 58%
- Microsoft (MSFT -1.13%) -- Up 57%
- Apple -- Up 48%
However, the onset of 2024 changed the paradigm of the group, and the performances of some stocks are beginning to diverge. In fact, a report in The Wall Street Journal suggests the Magnificent Seven "is now the Fab Four," made up of a subset of the original septet.
Let's look at the Fab Four and see what sets them apart.
Image source: Getty Images.
Fab Four stock No. 1: Nvidia
It isn't surprising to see Nvidia stock top the list, up 81% so far this year (as of this writing). The company pioneered the graphics processing units (GPUs) that revolutionized video games, and those same processors proved equally adept at handling the rigors of AI.
Nvidia dominates the space, controlling 95% of the GPUs used in data centers -- where much of AI processing is done -- according to CFRA analyst Angelo Zino. Furthermore, Nvidia is the gold standard for processing machine learning, an established branch of AI, with 95% of that market as well. This suggests it's a shoo-in as businesses and researchers alike begin to adopt generative AI.
The results are undeniable. For its fiscal 2024 fourth quarter (ended Jan. 28), Nvidia's revenue soared 265% year over year, while net income rose 769%.
Fab Four stock No. 2: Meta Platforms
Thanks largely to the wealth of data on its social media platforms, Meta Platforms long enlisted the aid of AI to surface relevant content for users and inform its targeted advertising. However, the advent of generative AI helped take its advertising acumen to the next level, boosting its stock by 41% so far this year.
Meta supplies a suite of advanced generative AI tools to advertisers, which helps make them -- and Meta -- more successful. For example, users can generate multiple backgrounds for a given ad, adjust the aspect ratio of an image, or revise text to better target a specific audience. The early results are impressive. Meta reports that marketers can save five or more hours per week, on average, because they can "create multiple [ad] variations with the click of a button."
Furthermore, Meta created a leading AI model -- LLaMA (Large Language Model Meta AI) -- which can be found on all the major cloud infrastructure platforms, helping Meta generate a brand new revenue stream.
These factors helped boost Meta's financial results. In the fourth quarter, revenue grew 25% year over year, while net income jumped 201%. While this was partially the result of easy comps, it also helps illustrate the strength of Meta's AI-driven digital advertising.
Fab Four stock No. 3: Amazon
When demand for generative AI increased last year, the popular narrative suggested that Amazon was late to join the AI race, giving competitors the upper hand.
Despite that misconception, the company announced the debut of Bedrock, a service that provides all the top AI models to Amazon Web Services (AWS) customers. They were joined by Titan, Amazon's own AI models, which were pre-trained on AWS. This allows its cloud users to streamline the process of generating custom AI systems. It also introduced Amazon Q, its generative AI-powered digital assistant.
Most recently, Amazon upped the ante, adding to its already sizable investment in start-up Anthropic AI, bringing its total stake to $4 billion. The company said Claude 3 -- its latest model -- scored top marks on AI benchmark tests, outperforming Google's Gemini Ultra and OpenAI's GPT-4.
For the fourth quarter, Amazon's net sales grew 14%, while net income surged 34-fold. While that's largely the result of easy comparable numbers, it also helps illustrate the strength of Amazon's industry-leading e-commerce and cloud infrastructure businesses, as well as its digital advertising segment -- all aided by its AI expertise. This has helped fuel stock price gains of 19% thus far in 2024.
Fab Four stock No. 4: Microsoft
Microsoft arguably helped kick off the AI revolution with its investment in OpenAI and the integration of generative AI capability into its suite of workplace productivity software. Like Amazon, Microsoft offers all the most popular AI models on its cloud infrastructure platform, Azure.
The company's biggest opportunity, however, will be courtesy of Copilot, its generative AI assistant. The company created a growing roster of industry- and job-specific assistants to automate time-consuming and mundane tasks.
Not only is Microsoft benefiting from the rapid adoption of Copilot, the company is also seeing a halo effect, with accelerating adoption of Azure Cloud, which grew faster than both AWS and Google Cloud in the calendar fourth quarter. The company noted that six percentage points of Azure's growth was the result of strong demand for AI.
During its fiscal 2024 second quarter, Microsoft's revenue grew 18% year over year, while net income jumped 33%. Its stock price followed, up 12% so far this year.
Losing their luster?
It's worth mentioning that the report suggested three of the Magnificent Seven stocks lagged the broader market -- Tesla, Apple, and Alphabet. However, as of this writing, while Tesla and Apple are down 33% and 12% respectively, Alphabet stock is up 11%, slightly better than the 9% gains of the S&P 500.
Deliveries of Tesla's electric vehicles slowed by more than 8% over the last year, and sales of Apple iPhones are off as well. Both companies are struggling in China as competition in the country ramps up. Furthermore, the U.S. Department of Justice filed an antitrust lawsuit against the iPhone maker, which will no doubt weigh on the stock for the foreseeable future. Alphabet has its own legal troubles, as the Justice Department has taken issue with Google's search supremacy.
From a valuation perspective, Alphabet, Meta Platforms, and Apple are selling for 23 times, 25 times, and 26 times forward earnings, respectively, a discount to a price-to-earnings ratio of 28 for the S&P 500. At the same time, Amazon is selling for less than 3 times sales, so each of these stocks is relatively inexpensive.
Investors with a long-term outlook would be best served by sticking to their investing game plan and ignore the calls for "What have you done for me lately?"
