What will 2024 bring for the Magnificent Seven? Part 1
Those at risk (Apple, Tesla, Nvidia)
PS. Do you know what happens to the Magnificent Seven in the famous 1960 Western?
At the end of the film, only three of them are still alive.
In this article, I would like to explain why I am particularly critical of at least three of the Magnificent Seven (Apple, Tesla, Nvidia) in 2024. I will then take a look at the other big tech giants in a follow-up article.
First of all, I want to make it clear that I do not believe that these big tech companies will be under any kind of existential threat in 2024.
That said, I do think that Apple, Tesla and Nvidia in particular are not good investments right now. Here is my assessment:
Apple
Apple AAPL 0.00%↑ still depends on the iPhone. Anyone who denies this, pointing to the booming services and subscriptions business, for example, forgets that the future of this business also depends on the iPhone user base continuing to grow.
After all, almost 20% of Apple's revenue comes from China. Sales there were already under pressure last financial year, and analysts are now even predicting a double-digit decline in iPhone sales and falling market share in China by 2024.
How will Apple compensate for this in the short term? Apple shareholders spoiled by success like to ignore the fact that Apple's revenue, EBIT and cash flow were already declining in the financial year 2023 (which ended in September).
Apple analysts are forecasting minimal sales growth of 3% this year, rising to 6-7% over the next two years. Given the situation in China, I think this is overly optimistic. Even the launch of the new Apple Vision Pro headset, which is supposed to bring us closer to the metaverse, cannot change this.
In my opinion, Apple is no longer a true growth company and should not be valued as such. I don't see how this giant company could achieve sustained double-digit revenue growth again. It would have to develop another really big business outside the iPhone ecosystem. I do not believe in this "next big thing" under CEO Tim Cook.
Nevertheless, Apple shares are priced at almost 30 times free cash flow at the beginning of 2024. The P/E ratio is also above average (also compared to the valuation in recent years). The EV/sales ratio looks similar.
I think an earnings multiple of max. 20 is appropriate. At 185 USD, I think Apple shares are about 30% overvalued.
Tesla
Alongside Nvidia and Meta, Tesla TSLA 0.00%↑ stock was the big winner last year. Tesla's share price doubled in 2023. Although Tesla's market position as the leading electric car manufacturer has not exactly improved (to put it mildly).
In the last quarter of 2023, Tesla was overtaken by BYD as the world's largest manufacturer of electric cars. This is despite the fact that Elon Musk has unleashed a price war with deep discounts, severely eroding Tesla's previously decent margins.
I am curious to see if Tesla can remain cash flow positive in 2024. If not, that should weigh heavily on the share price. So Elon has to keep the money together. On the other hand, Tesla is doomed to grow. If Elon were to abandon his ambitious plans for revenue and volume growth and focus on profitability, the share price would collapse like a house of cards.
Elon himself admitted that the Cybertruck would not be helpful at the moment: "We've dug our own grave with the Cybertruck", he said, not entirely seriously, in a conference call with analysts.
Will Tesla's humanoid robot Optimus be able to fix the Tesla investor story?
I doubt it.
Tesla's stock is priced like it is from another planet, not like an electric car manufacturer struggling with declining market share. A P/E ratio of almost 100, a triple-digit cash flow multiple and an EV/sales ratio of 7-8 are simply not consistent with an industrial company with a 20% gross margin.
If you still feel comfortable with Tesla shares in your portfolio, then you must be a true Elon Musk fan. I also admire his vision. But he is unpredictable. What will happen to Tesla shares if Elon no longer wants the CEO job?
In my opinion, no top 100 company on the planet is as dependent on its boss as Tesla is. And Elon Musk is not immortal, no matter how many pills he pops.
I have the utmost respect for Elon Musk's life's work; he will go down in history as one of the greatest visionaries of all time. But he is also a people catcher and a questionable role model for millions of his fans.
Musk has driven Tesla shares to fundamentally unjustified heights through his outstanding public relations work (to put it positively). For me, Tesla is a ticking time bomb, with at least 50% downside potential*.
Nvidia
In my previous article on Nvidia NVDA 0.00%↑ just three months ago, I denied the question of whether Nvidia shares were a good investment for the next 10 years.
Since then, Nvidia's share price has risen another 15% to new highs. And in the first few trading days of the new year, Nvidia was by far the best choice among big tech stocks.
For the financial year 2024, which ends in January, Nvidia expects revenues to increase by around 120%. Net profit is expected to increase more than sixfold!
However, almost all of Nvidia's growth is due to the price explosion of GPUs in the company's data centre segment (i.e. their AI chips). In the first nine months of FY24, Nvidia's product manufacturing costs increased by only 20%. This shows how much the GPU shortage has fueled Nvidia's revenue growth. Customers are currently paying almost any price to get their hands on Nvidia's coveted AI chips. There are just too few of them.
Nvidia intends to ship significantly more GPUs to its customers in FY25. This alone should ease the shortage of GPUs, with a corresponding impact on prices and gross margins.
In addition, competition in AI chips will inevitably intensify over the next two years:
- AMD plans to make its MI300 AI chips largely available in 2024 and has reportedly caught up with Nvidia.
- Microsoft has announced its first in-house AI chip, Azure Maia, developed in partnership with OpenAI, which will be available in 2024.
- Intel is also planning to launch its Falcon Shores GPU in 2025 as a direct competitor to Nvidia.
All of this is likely to put pressure on Nvidia's pricing power sooner rather than later. Nvidia's highly lucrative monopoly will not last.
Nvidia is also facing regulatory headwinds: US authorities have twice imposed restrictions on the export of AI GPUs to China. This is unlikely to go unnoticed, especially as Chinese customers are less than enthusiastic about the custom AI accelerators designed for them. Nvidia currently generates a good 20% of its revenue in China.
Nvidia is a fantastic company, but I believe that the analyst estimates, which mostly assume a sustained high net margin of 50% for the next few years, are overly optimistic.
History is likely to repeat itself: similar to other disruptive technological developments of the past decades (network, internet, smartphone), investors and analysts tend to extrapolate the extraordinarily positive short-term effects of the AI revolution too far into the future. The rude awakening of the "shovel sellers" is inevitable.
No one knows when that awakening will come. The hype around Nvidia stock may well continue for a few more quarters. But one thing is clear: the further Nvidia's share price rises, the lower it will fall.
A great company is not always a great investment.
Because Valuation Matters!
In a follow-up article , I will also give my assessment for 2024 on the other four of the Magnificent Seven (Microsoft, Amazon, Meta and Alphabet). If you don't want to miss this article, you can subscribe to my free High Growth Investing Substack here.
*Disclaimer:
The author and/or associated persons or companies do NOT own any shares in any of the companies mentioned in this article. The author and/or associated persons or companies hold a short position of Tesla (as of 14 Jan 2024). This article is an expression of opinion and does not constitute investment advice.