For those who are not familiar with the 1960 American Western action film titled “The Magnificent Seven”, the title of the film has been borrowed to describe the current seven biggest US Mega Cap Tech stocks. Moreover, if you remember the film, you will also know that not all of the “magnificent seven” survived, and the story did not conclude with a happy ending. While Yul Brynner and Steve McQueen rode away, leaving the young Chico in the tender arms of his new senorita, there were four dead cowboys who had not been so lucky. So, I thought it might be time to decide which company is which character, and if the same number of casualties are likely for investors.
For those who have not seen the movie and intend to – Spoilers alert!
The first of the seven to be killed is clearly Tesla; down over 20% this month as the reality is dawning that this might be a car company after all, subject to the normal forces of supply and demand. That makes Tesla the equivalent of Harry Luck (Brad Dexter) who, having ridden away from the group before the final battle, returns in a show of loyalty and while rescuing several comrades gets shot for his troubles. He died given the false assurance that they were really fighting over some elusive gold; appropriate for Tesla I feel.
Second to fall, I suggest, will be Apple which makes them Lee (Robert Vaughan) the very smooth gambler who lost his nerve. He pulled himself together at the last minute, but there was still a bullet with his name on it. Apple is not suffering from a loss of nerve, but of momentum in its most important product and biggest growth market, China; since this became clear the stock has lagged and this new Vision Pro headset will not rescue them any time soon. Why pay that multiple for minimal growth when Apple also faces risks to the business from both regulators and geopolitics?
Also shot down this week following its lacklustre earnings was Google. For me they represent Bernardo (Charles Bronson), a good fighter but facing overwhelming odds he was killed near the end of the shootout. My problem with Google is that they have everything to lose and little to gain; from being the dominant company in digital advertising through search and YouTube, they now compete with Facebook reels, Instagram, Tik-Tok, Snapchat, Netflix, Amazon Prime etc etc. Yes, they are in Cloud, but very much 3rd place and by their own admission when it comes to AI Language Models “we have no moat, neither does Open AI”. To catch Microsoft, they are now embarking on a massive increase in Capex which means lower margins.
Now it gets harder because I have one more dead Cowboy to place, but my companies are not quite complying with the film currently, although Nvidia is still yet to report! However, in the role of knife throwing Britt (James Coburn) who also fails to come out alive, I am leaning towards Microsoft. This is the most controversial one given current conditions, but I am referring to the stock price performance from this point. The reason is twofold: first, expectations for the success of CoPilot (their AI product) are sky high and I suggest are now well priced into the shares and second, Google is not going down without a fight. I see the equivalent of another gunfight breaking out here, which of course hurts both of them and will only be to the benefit of the arms dealer: Nvidia.
Nvidia is Vin (Steve McQueen) who rode away with Yul Brynner at the end of the film. Their GPUs (there’s no graphics involved with AI, so they’re becoming known simply as “Accelerators”) that used to run game consoles, then mined Crypto, now work to train Large Language Models. Currently the sky is the limit on growth, as long as the other members of the Magnificent Seven keep spending on AI; which is exactly what they will do at an increasing rate. As a result, Nvidia gets cheaper each quarter and trouncing expectations, because the analysts incorrectly keep fading the growth of the classic ‘S’ curve too early. Ah, but is it in the price of the stock? That’s harder to say of course, but there will be plenty of willing buyers of any correction and it is not trading at the crazy prices companies such as Zoom reached in the pandemic.
Amazon is a survivor and somehow you feel always will be, given that it is a more diverse collection of businesses anyway. More stable than the rest perhaps, they are running the divisions better now (not burning $10bn a year on things like Alexa), margins are improving after the downturn last year and they will grow advertising through its introduction on Prime. Amazon is Chico who stays on in the village, settles down and hangs up his gun belt.
The leader of the Magnificent Seven was Chris (Yul Brynner) and that is Meta. You’ll have to take my word for it, but I thought this before they put out numbers and went up 20% in a day! That is why it is the largest position in my US model portfolio. Why? Because their approach to AI is to promote open source, which I think will triumph in time and their business model will see the greatest return from its rollout. As of the end of January, you could have 3 Meta for every 1 Apple – that’s a no-brainer trade for me. Buy dips on Meta.
The last line of the film is telling: “Only the farmers won. We lost. We always lose.” Well, always for gunslingers, but sometimes for Tech investors?
I will suggest some ‘farmers’ next month.