The introduction of ChatGPT by OpenAI on Nov. 30, 2022 has been compared to seminal events such as the detonation of the first atomic weapon, which ushered in the Atomic Age on July 16, 1945 in New Mexico. Whether artificial intelligence will take us to a Jetsonian utopia or the dystopian future of Mad Max is beyond the scope of this discussion. However, investors are certainly imagining a utopian future for AI-driven tech going by the price action, lifting the S&P 500 by over 14% since the software was released.
The Magnificent Seven of AI
While the S&P 500 has gained since that landmark date, AI mania has lifted the so-called "Magnificent Seven" to new heights. These seven stocks, which consist of Apple Inc. (AAPL, Financial), Meta Platforms Inc. (META, Financial), Tesla Inc. (TSLA, Financial), Alphabet Inc. (GOOG, Financial), Microsoft Corp. (MSFT, Financial), Nvidia Corp. (NVDA, Financial) and Amazon.com Inc. (AMZN, Financial), were anointed by investors as their favorites to benefit from the AI revolution. I have no idea whether this assessment is accurate or not, but investors are voting with their money by driving up the value of these companies. Most of these gains have come from expansion of price-earnings multiples.
Here is an overview of the Magnificent Seven stocks mapped by market capitalization with their year-to-date returns.
Market capitalization and price-earnings ratios
Price-earnings ratios for the Magnificent Seven range from a low of 33 for Apple to a high of 305 for Amazon. Five of the seven are trillion-dollar corporations, while Apple is now worth over $3 trillion. Do trees really grow to the sky? It appears so.
Company Name | Current Price | Value | Price (52-Week Range) | Cost per Share | Gain | Price-to-Operating Cash Flow Ratio | PE Ratio | Market Cap | ROC % | Earnings Yield % | 1-Year Market Cap Change % |
| Meta Platforms Inc. | $298.60 | $298 | $88.09 to $318.68 | $118.10 | $180 (152.8%) | 15.58 | 37.05 | $765,232 | 17.49 | 2.70 | -9.30 |
| Tesla Inc. | $263.91 | $263 | $101.81 to$314.67 | $194.70 | $69 (35.5%) | 65.80 | 74.76 | $837,649 | 24.60 | 1.34 | 18.35 |
| Nvidia Corp. | $454.52 | $454 | $108.13 to$480.88 | $169.23 | $285 (168.6%) | 165.98 | 236.73 | $1,122,664 | 20.32 | 0.42 | 47.77 |
| Amazon.com Inc. | $128.15 | $128 | $81.43 to$146.57 | $96.54 | $32 (32.7%) | 24.17 | 305.12 | $1,314,864 | 5.30 | 0.33 | -36.15 |
| Alphabet Inc. | $129.40 | $129 | $83.45 to$131.37 | $101.45 | $28 (27.6%) | 18.64 | 27.42 | $1,630,030 | 27.36 | 3.65 | -27.98 |
| Microsoft Corp. | $337.92 | $337 | $213.43 to$366.78 | $255.14 | $83 (32.4%) | 30.35 | 34.86 | $2,511,633 | 25.87 | 2.87 | -7.07 |
| Apple Inc. | $194.50 | $194 | $124.17 to$198.23 | $148.03 | $46 (31.4%) | 28.50 | 33.02 | $3,059,233 | 31.31 | 3.03 | -7.81 |
GF Value and business performance
Below are the GF Value charts for the Magnificent Seven. Apart from Nvidia, the stocks appear to be reasonably priced compared to the recent past. The GF Value represents the current intrinsic value of a stock derived by a proprietary GuruFocus method which uses the company's historical price multiples, an adjustment factor based on its past returns and growth and future estimates of business performance.
These AI-powered companies boast substantial revenues, a proven and stellar track record of profitability and dominant market presence. While one may question their current share prices, there is no denying their impressive business performance and broad competitive moats.
Historical parallels and lessons
We can find a parallel of the current market with the Nifty Fifty stocks of the early 1970s. These companies also had exceptional histories and promising futures, much like the Magnificent Seven. In the '60s and '70s, Polaroid, Pfizer Inc. (PFE, Financial), McDonald's Corp. (MCD, Financial), Johnson & Johnson (JNJ, Financial), Xerox Holdings Corp. (XRX, Financial) and Coca-Cola Co. (KO) resembled the remarkable stocks of today. Just like now, these stocks traded at high valuations well above the broader market, but eventually faced challenges during the recessionary period from the mid-1970s to early '80s.
In his 1998 book, "Stocks for the Long Run," Jeremy Siegel, a finance professor at Wharton, argued against labeling the Nifty Fifty phenomenon as a bubble. He showed that an investor who purchased an equally-weighted basket of these 50 stocks at their peak price-earnings ratios in late 1972 would have achieved returns over the next 25 years that were remarkably similar to those of the broader S&P 500 Index.
From Siegel's research, two lessons emerged. First, investors should not disregard stocks simply because they appear more expensive than average. The market often assigns higher earnings multiples to companies with superior growth potential compared to ordinary companies. In many cases, these higher valuations are justified.
Second, investors must not blindly pay any price for these seemingly superior growth stocks. Value still matters. For instance, had an investor bought the cheaper half of the Nifty Fifty in 1972, they would have reaped returns approximately double that of someone who invested in the more expensive half of the list.
Conclusion
Based on the GF Values of the Magnificent Seven, I would propose that Meta Platforms, Tesla, Alphabet and Amazon still offer good value currently. I am cautious about Microsoft and Apple, wonderful as they are. Nvidia appears to be the only company I would avoid currently based on valuation.
In addition, the AI revolution is likely very broad and deep, very much like the internet revolution of the late 1990s, and a lot more stocks will benefit, which are not currently front and center. Stocks like Adobe Inc. (ADBE, Financial), Oracle Corp. (ORCL, Financial), Accenture PLC (ACN, Financial) and Salesforce Inc. (CRM, Financial) should be watched.
