Time for Tech Investors to Be Selective

US tech darlings lose their luster as performance diverges in 2024

The high-flying days of the “Magnificent Seven,” a group of tech giants that fueled the market in 2023, may be over. While the narrative surrounding artificial intelligence (AI) remains strong, individual company performance has become a tale of two halves.

In 2023, these seven companies – Nvidia (NVDA), Meta (META), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Apple (AAPL), and Tesla (TSLA) – saw an average stock price increase of a whopping 112%. Their dominance drove the S&P 500 as investors sought refuge in tech stocks during a period of rising interest rates and recession fears.

However, 2024 paints a different picture. The “Magnificent Seven” are no longer riding in unison. Only Nvidia and Meta continue to experience significant gains, while Apple’s stock price has dipped, and Tesla has become the biggest decliner on the S&P 500 so far this year.

While the Mag 7 collectively managed a 17% increase in the first quarter, compared to the S&P 500’s 10% rise, the disparity within the group is stark. Nvidia soared 82%, while Tesla plummeted nearly 30%. Only four of the seven companies have outperformed the index year-to-date.

Focus on Fundamentals, Not Just Names

Analysts are urging investors to abandon the “blind trust” approach and delve deeper into the fundamentals of each company before investing.

“Last year, you could have been completely off on the fundamentals and still made a profit” by simply picking any of these hot stocks, says Dan Niles, founder of Satori Fund. “This year, it’s all about companies delivering strong earnings reports.”

Beyond the Hype: A Closer Look

With some members of the “Magnificent Seven” losing their shine, experts advise investors to take a more critical look at individual companies rather than blindly trusting the group to continue propelling the market upwards.

The diverging performance became evident after the companies released their quarterly earnings. Nvidia, Meta, Amazon, Alphabet, and Microsoft all reported strong results, while Apple and Tesla fell short of expectations. This performance disparity highlights the difficulty of classifying them as a single entity.

Apple, for instance, serves as a prime example of how the market previously overlooked fundamentals. Despite the iPhone maker lowering estimates throughout 2023, its stock price still managed near 50% growth for the year. However, this year’s market correction saw Apple’s stock fall 11% in the first quarter.

Tesla, which doubled its stock price in 2023, has faced significant challenges in 2024. Waning consumer demand has forced price cuts in the US and other markets to stimulate sales, impacting profit margins. Additionally, competition in the electric vehicle (EV) market, particularly in China, is intensifying.

Fantastic Four or Super Six?

Niles now refers to the group of outperformers as the “Fantastic Four,” while LPL Financial has dubbed them the “Super Six” after excluding Tesla.

Interestingly, despite questions about the continued relevance of the “Magnificent Seven” label, the Roundhill Magnificent Seven ETF (MAGS) has seen rising inflows and a 17% increase in the first quarter.

This ETF, with $175 million under management, provides exposure to all seven stocks, regardless of their performance. Dave Mazza, chief strategy officer at Roundhill Investments, explains that the market is still coalescing around the “thesis” of these seven companies, justifying their inclusion in the portfolio. He adds that they would only consider reevaluating the composition if a clear replacement emerges or one of the existing companies no longer warrants inclusion.

The takeaway? While the “Magnificent Seven” may no longer represent a unified force in the market, individual companies within the group might still offer attractive investment opportunities. However, in today’s environment, thorough fundamental analysis is crucial for making informed investment decisions.