In case you haven't noticed, the bulls have a firm grip on Wall Street. Since the green flag flew in early 2023, it has been timeless Dow Jones Industrial Averagewidely supported S&P500and growth-oriented Nasdaq Composite have risen 19%, 36% and 56% respectively, reaching new all-time highs.
While certain sectors and industries have played a role in pushing the broader market higher, theBeautiful sevenare credited with putting the weight of Wall Street on their proverbial backs and taking the stock market to new heights.
Wall Street's view on the Magnificent Seven's stock is mixed
The Magnificent Seven represent seven of the country's largest and most influential companies. The Magnificent Seven are ranked in descending order of market capitalization:
Aside from the fact that each of these companies handily outperformed the benchmark S&P 500 in the returns column over the past decade, they offer clearly defined competitive advantages, if not outright competitive advantages, within their respective industries.
For example, Alphabet's Google accounts for nearly 91% of the global Internet search sharewhile Amazon's e-commerce marketplace accounted for nearly 38% of US online retail sales in 2023. Amazon, Microsoft and Alphabet are also Nos. 1, 2 and 3 respectively in terms of cloud infrastructure services market share in terms of enterprise spending.
Despite the clear catalysts presented by the Magnificent Seven stocks, not all Wall Street analysts share an optimistic view of their future. Based on the floor price targets of select Wall Street analysts, the next three Magnificent Seven components could fall as much as 86%.
Metaplatforms: implicit disadvantage of 24%
The first part of the Magnificent Seven that at least one analyst believes could meaningfully decline in the not-too-distant future is social media giant Meta Platforms.
Earlier this month, BNP Paribas Exane analyst Stefan Slowinski, who often takes a contrarian view on some of Wall Street's leading companies, set a price target of just $360 for Meta stock. This suggests a 24% downtrend is underway, based on the closing price of $476.20 per share on May 10.
According to Slowinski, Meta lacks new revenue streams compared to the other companies spending heavily on artificial intelligence (AI) solutions. This lack of new revenue channels, coupled with the company's forecast of higher capital expenditures related to AI, has Slowinski believing Meta could underperform.
On the other hand, Meta is the undisputed leader among social media platforms. The company owns the world's largest social media real estate, including the most visited social site (Facebook), and attracted 3.24 billion users daily to its family of apps in the quarter ended March. Companies understand that they won't reach a wider audience on any other social media platform, which typically gives Meta exceptionally strong ad pricing.
Metaplatforms also benefit from extended periods of economic expansion. Because it makes almost 98% of its revenue from advertising, the company would be vulnerable to a recession. Right now, some key indicators, including a historic decline in the US M2 money supply, suggest that an economic downturn is likely.
However, recessions are short-lived. All twelve US recessions since 1945 have lasted between two and eighteen months. By comparison, most growth periods last several years and sometimes last even ten years. Ad-driven businesses thrive during these long-winded expansions.
A final reason why Slowinski may be forced to eat his words is Meta's balance sheet. The company ended March with $58.1 billion in cash, cash equivalents and marketable securities, and generated more than $19.2 billion in net cash from its operations in the first three months of 2024. In other words, it has the capital to take risks and invest aggressively in the future – even if the returns on those investments won't be material to its top and bottom line in a few years.
Nvidia: implicit disadvantage of 31%
The second member of the Magnificent Seven to be considered anything but “magnificent” by a Wall Street analyst is semiconductor giant Nvidia.
Based on a February note from DA Davidson analyst Gil Luria, there are concerns about demand peaking for Nvidia's AI-accelerating graphics processing units (GPUs) in the current year. With the prospect of slower growth ahead, Luria's low-water price target of $620 implies a 31% decline for Nvidia's stock over the coming year.
On the other hand, Nvidia's GPUs have come to dominate the AI-accelerated data centers. With demand easily exceeding supply, strong pricing power helped the data center segment more than triple revenue in fiscal 2024 (ending January 28).
But Luria hit the nail on the head when it comes to competition. While most people might focus on external competitors such as Advanced micro devices And Intelboth of which are rolling out AI accelerators for enterprise data centers, internal competition from Nvidia's top customers is the much bigger concern.
Microsoft, Meta Platforms, Amazon and Alphabet are Nvidia's four largest customers, accounting for approximately 40% of net revenue. But these four giants are all developing their own AI GPUs. Even if this is purely for ancillary purposes, demand for Nvidia's high-performance chips would likely decline after the current fiscal year.
Furthermore, there hasn't been a “next big thing” investment or innovation in the last thirty years that hasn't come through a bubble-bursting event. Without a doubt, investors overestimate the introduction or adoption of new technologies. Since no company has benefited more from the rise of AI, Nvidia would theoretically be hit hardest if the AI bubble bursts.
Luria's price target on Nvidia will likely be achieved.
Tesla: implicit disadvantage of 86%
But the disaster of the day One of the stocks in the Magnificent Seven, based on a Wall Street expert's prediction, is electric vehicle (EV) maker Tesla. Gordon Johnson, the CEO and founder of GLJ Research and longtime Tesla Bear, believes shares will reach $23.53.
This oddly specific price target was achieved by applying a multiple of 15 times Tesla's 2025 earnings per share (EPS) and working backwards with a 9% discount rate. Keep in mind that this price target was issued earlier this year and Tesla's consensus EPS for 2025 has since fallen. If Johnson's price target proves accurate, Tesla shares would implode 86% from where they closed on May 10.
Tesla has made a habit of proving skeptics wrong. For example, it is the only pure EV manufacturer that generates recurring profits. Tesla recently introduced its fifth mass production model (Cybertruck) and has the capacity to roll out more than 2 million electric vehicles annually.
However, the headwinds are certainly increasing for North America's leading EV company.
For example, increasing competition in electric and hybrid vehicles has forced Tesla to reduce the sales price of its primary production models (3, S, X and Y) more than six times since the beginning of 2023. CEO Elon Musk has done that. It was clear that his company's pricing strategy is entirely based on demand. But even with these aggressive cuts, Tesla's inventory levels have soared and operating margins have fallen.
Tesla's attempts to become more than just a car company have not been smooth sailing either. Power Generation and Storage revenue growth has slowed dramatically, while the Services segment's gross margin is consistently in the low to mid single digits. Meanwhile, more than half of the company's pretax revenue during the quarter ended in March came from unsustainable sources (for example, interest income and the sale of regulatory tax credits).
The final nail in the coffin is that Musk has proven to be a tangible liability for the company. Many of Musk's promises, such as Level 5 autonomy and robotaxis, which are already baked into Tesla's valuation, have not materialized. The longer these claims go unfulfilled, the more likely it is that Tesla's massive valuation premium over other auto stocks will diminish.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool's board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short January 2026 $405 calls to Microsoft, and short May 2024 $47 calls to Intel. The Motley Fool has one disclosure policy.
3 'Magnificent Seven' Stocks That Could Plunge Up to 86% According to Select Wall Street Analysts was originally published by The Motley Fool
