Magnificent Seven Stocks Slide, Valuations Looking ‘More Interesting’

The
combination
of
high
valuations
and
an
overly
concentrated
market
created
an
environment
primed
for
a
selloff,
according
to Eric
Compton,
director
of
equity
research
at
Morningstar:
“We
thought
Nvidia,
Apple,
Meta,
and
Tesla
were
12%-30%
overvalued
just
two
weeks
ago,
while
Alphabet,
Microsoft,
and
Amazon
were
fairly
valued.
We
didn’t
see
anything
that
looked
cheap.”

As
valuations
have
become
more
attractive,
two
of
the
Magnificent
Seven
–
Microsoft
and
Amazon
–
have
become
undervalued
according
to
Morningstar
analysts.
Amazon
dropped
into
4-star
territory
on
Friday
after
selling
off
8.8%.

“Valuations
are
starting
to
look
more
interesting,
but
overall,
the
technology
sector
still
isn’t
super
cheap,”
Compton
says.
“A
lot
of
the
names
that
have
sold
off
have
often
started
to
come
back
to
our
fair
values
because
they
were
already
looking
expensive.”

He
notes
that
the
selloff
has
been
“a
bit
more
concentrated
in
semiconductor-related
names,
while
software
names
have
seen
a
bit
more
resilience.
This
is
a
reverse
of
what
we’ve
seen
in
the
recent
past,
with
semis
skyrocketing
and
outperforming
everything”.

Magnificent
Seven
Leading
Stock
Market
Lower

From
the
start
of
2023
until
the
most
recent
peak
in
the
US
Market
Index
on
July
16,
the
market
returned
50.2%
cumulatively.
Leading
the
rally
was
Nvidia,
which
surged
765.2%
and
contributed
7.5
percentage
points
to
the
gain
on
the
market.
Microsoft
and
Apple
each
gained
over
80%
and
contributed
over
4
percentage
points
to
the
market
return.
The
next
three
largest
were
Amazon,
Alphabet,
and
Meta,
each
contributing
over
2
percentage
points.

That
trend
has
reversed.
Since
July
16,
the
index
is
down
8.6%,
with
the
Magnificent
Seven
responsible
for
nearly
half
that
loss.
Nvidia
was
the
largest
detractor
over
the
past
three
days,
as
the
stock
fell
14.2%
and
detracted
0.8
percentage
points
from
the
return
on
the
Morningstar
US
Market
Index.
The
second-largest
detractor
was
Amazon,
which
fell
13.9%
and
detracted
0.5
percentage
points
after
the
company
reported
earnings
on
August
1.

Overall,
the
Magnificent
Seven
accounted
for
2.4
percentage
points
of
the
US
Market
Index’s
6.3%
decline
since
the
start
of
August.
Other
notable
detractors
include
Intel (INTC),
which
plummeted
34.6%
following weak
second-quarter
earnings,
JPMorgan
Chase (JPM),
which
fell
8.4%,
and
Broadcom (AVGO),
which
dropped
11.6%.

Earnings
Largely
Positive

The
selloff
in
the
stock
market
has
coincided
with
second-quarter
earnings.
During
this
time,
the
focus
across
much
of
the
Magnificent
Seven
has
again
been
artificial
intelligence.

“Most
of
the
Magnificent
Seven
are
also
tied
to
the
AI
train,
one
way
or
another,”
Compton
says.
“While
it
hasn’t
been
all
negative
results
on
AI
during
the
current
earnings
season,
we’ve
seen
a
continuing
emphasis
of
‘we’re
going
to
keep
spending’
from
the
companies,
while
investors
are
starting
to
question
when
the
return
on
this
investment
will
materialise,
and
how
good
those
returns
might
be.”

Here’s
how
Compton
summarises
Morningstar’s
views
on
the
Magnificent
Seven’s
earnings
(minus
Nvidia,
which
reports
August
28):

• Microsoft: Solid
earnings.
We
raised
our
fair
value
estimate
and
liked
the
accelerated
Azure-related
revenues.
The
market
reaction
was
muted.

• Alphabet: Solid
ad
revenue
and
Google
Cloud
growth.

• Amazon: Results
roughly
met
expectations.
AWS
remains
strong.

• Tesla: Earnings
missed
consensus.
The
market
reaction
was
negative.

• Meta: Raised
its
capex
guide
to
the
high
end
of
previous
guidance.
The
firm
emphasised
that
it
will
keep
spending
in
2025.
Otherwise,
revenue
growth
and
ad
spending
remained
healthy.

• Apple: We
raised
our
fair
value
estimate.
Apple
is
still
dealing
with
slowing
iPhone
sales,
and
it
is
looking
to
2025
for
a
new
model
launch
and
a
pickup
in
sales.

Are
Any
of
the
Magnificent
Seven
Stocks
a
Buy?

Of
the
six
stocks
that
have
reported
second-quarter
earnings
so
far,
five
saw
their
fair
value
estimates
raised,
while
Tesla
saw
no
change.
That
left
four
fairly
valued,
while
Apple
is
overvalued,
and
Microsoft
and
Amazon
are
undervalued.

With
Microsoft’s
stock
near
$400
per
share,
it’s
in
4-star
territory,
trading
at
a
19%
discount
to
its
fair
value
estimate
of
$490.
Amazon
stock
is
also
in
4-star
territory,
trading
near
$160
per
share,
a
17%
discount
to
its
fair
value
estimate
of
$195.

Compton
also
highlights
Adobe (ADBE),
Palo
Alto
Networks (PANW),
NXP
Semiconductors (NXPI),
and
CrowdStrike (CRWD) as
undervalued
tech
names
for
investors
to
consider.

Here’s
more
of
what
Morningstar
analysts
think
of
the
Magnificent
Seven.

Alphabet

• Morningstar
Rating:
3
stars
•

Fair
Value
Estimate:
$182.00

Director
of
equity
research Michael
Hodel raised
Alphabet’s
fair
value
estimate
to
$182
from
$179
following
second-quarter
earnings.
“Solid
ad
revenue
growth
during
the
second
quarter
contradicts
the
notion
that
Alphabet
is
losing
its
footing
in
the
search
business,”
he
says.
“Also,
growth
in
the
Google
Cloud
business
accelerated
again,
reaching
the
fastest
pace
in
18
months
as
AI
tools
augment
broader
cloud
adoption.”

Amazon.com

•

Morningstar
Rating:
4
stars
•

Fair
Value
Estimate:
$195.00

Amazon
(AMZN)
saw
its
fair
value
estimate
raised
to
$195
per
share
from
$193.
“The
company’s
third-quarter
outlook
aligned
with
our
revenue
estimate
and
was
better
than
our
operating
income
estimate,”
says
senior
equity
research
analyst Dan
Romanoff.
“Changes
to
our
model
are
modest
but
centre
around
continued
profitability
enhancements
in
the
near
term.
Amazon
continues
to
take
strides
in
efficiency
improvements
throughout
the
network,
which
helps
lower
costs
and
improve
delivery
speeds,
and
ultimately
drives
increased
purchases
by
prime
members.
After
a
pullback
that
began
in
early
July,
we
see
shares
as
increasingly
attractive.”

Apple

•

Morningstar
Rating:
2
stars
•

Fair
Value
Estimate:
$185.00

Equity
analyst William
Kerwin bumped
up
Apple’s
(AAPL)
fair
value
estimate
to
$185
from
$170,
due
to
an
increase
in
medium-term
iPhone
revenue.
“We
continue
to
expect
strong
revenue
growth
in
fiscal
2025
as
users
upgrade
their
iPhones
to
take
advantage
of
Apple’s
generative
artificial
intelligence
features,
requiring
the
latest
and
greatest
hardware,”
he
says.
“We
now
forecast
double-digit
iPhone
revenue
growth
in
fiscal
2025
and
another
strong
year
of
revenue
growth
in
fiscal
2026.
iPhone
revenue
remains
the
primary
driver
of
Apple’s
results.
We
see
it
as
the
linchpin
to
the
firm’s
walled
garden
ecosystem
of
hardware,
software,
and
services,
which
underpins
our
wide
moat
rating
and
long-term
growth
thesis.
However,
we
continue
to
see
shares
as
overvalued.
Apple’s
current
stock
price
implies
closer
to
20%
iPhone
revenue
growth
in
fiscal
2025,
which
we
see
as
lofty
given
headwinds
to
growth
in
China
and
slowing
consumer
phone
upgrade
cycles.”

Meta
Platforms

•

Morningstar
Rating:
3
stars
•

Fair
Value
Estimate:
$450.00

Meta
saw
its
fair
value
estimate
raised
to
$450
from
$400.
“Meta
continues
to
deliver
solid
results
amid
strong
digital
advertising
demand
while
investing
aggressively
in
AI-related
infrastructure,
technology,
and
products,”
says
Hodel.
“The
firm
tightened
its
capital
spending
forecast
to
the
upper
end
of
its
previous
expectations
and
said
that
investment
growth
will
be
‘significant’
in
2025.
Meta
reiterated
that
it
believes
the
computing
capacity
it
is
building
can
be
used
for
various
tasks,
with
the
flexibility
to
shift
wherever
the
best
opportunities
emerge,
a
similar
view
that
Alphabet
has
shared.
We
aren’t
convinced
Meta
will
earn
strong
returns
on
its
infrastructure
investment,
but
we
expect
the
firm
will
continue
to
generate
strong
cash
flow
regardless
of
the
direction
AI
takes.
We
were
also
pleased
the
firm
maintained
its
expense
forecast
for
the
year.”

Microsoft

•

Morningstar
Rating:
4
stars
•

Fair
Value
Estimate:
$490.00

Romanoff
bumped
up
Microsoft’s
fair
value
estimate
to
$490
per
share
from
$435
due
to
accelerating
Azure
growth.
“In
an
earnings
call
packed
with
new
data
points
around
artificial
intelligence-related
demand,
which
were
impressive,
in
our
view,
the
single
most
important
item
was
guidance
that
calls
for
Azure
revenue
to
accelerate
in
the
second
half
of
the
year
as
the
current
surging
investment
in
data
centre
capacity
comes
online,”
says
Romanoff.
“Therefore,
we
raised
our
revenue
growth
estimates
for
the
medium
term,
and
we
also
tweaked
our
profitability
assumptions
higher
based
on
consistently
good
performance
and
a
solid
outlook.
Revenue
was
again
governed
by
data
centre
capacity
constraints
and
several
pockets
of
slight
weakness
arising
in
Europe.
With
shares
down
slightly
after
hours
following
a
recent
pullback,
we
see
the
stock
as
attractive.”

Nvidia

•

Morningstar
Rating:
3
stars
•

Fair
Value
Estimate:
$105.00

Nvidia
reports
second-quarter
earnings
on
August
28.
Following
first-quarter
earnings
in
May,
equity
strategist Brian
Colello wrote:
“Wide-moat
Nvidia
once
again
reported
stellar
quarterly
results
and
provided
investors
with
even
rosier
expectations
for
the
upcoming
quarter,
as
the
company
remains
the
clear
winner
in
the
race
to
build
out
generative
artificial
intelligence
capabilities.
We’re
encouraged
by
management’s
commentary
that
demand
for
its
upcoming
Blackwell
products
should
exceed
supply
into
calendar
2025,
and
we
see
no
signs
of
AI
demand
slowing
either.”

Tesla

•

Morningstar
Rating:
3
stars
•

Fair
Value
Estimate:
$200.00

Equity
strategist Seth
Goldstein maintained
Tesla’s
$200
per
share
fair
value
estimate
following
second-quarter
earnings
that
line
with
his
expectations.
“Tesla’s
second-quarter
results
were
largely
in
line
with
our
view
for
the
cadence
of
the
year,”
says
Goldstein.
“Tesla
shares
were
down
8%
in
after-hours
trading.
We
think
the
market
is
reacting
to
earnings
coming
in
below
FactSet
consensus
estimates,
as
well
as
management’s
lack
of
details
for
two
key
growth
projects:
the
affordable
vehicle
and
the
full
self-driving.”

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