AMD vs. Nvidia: The Battle for Trillion-Dollar Dominance in AI

The trillion-dollar club, boasting only, Inc. (AMZN), Alphabet Inc. (GOOG), and Meta Platforms, Inc. (META) as its only members, is incredibly exclusive. However, the landscape might soon shift, with another company on the brink of joining the ranks within the next decade.

Advanced Micro Devices, Inc. (AMD), being a stalwart force in driving innovation for over 50 years, particularly in high-performance computing, graphics, and visualization technologies, has now emerged as a formidable contender to NVIDIA Corporation (NVDA) in the AI chip market, signaling a potential shake-up in the industry's hierarchy.

AMD's Growth and Expansion Ventures

AMD stands to benefit significantly from its expansion initiatives, evidenced by the recent unveiling of its MI300 lineup. These data center chips, catering to AI workloads, offer two configurations: the pure GPU MI300X and the combined GPU-CPU MI300A, directly challenging NVDA's dominance.

With NVDA struggling to meet chip demand, AMD has a prime opportunity to capture market share. This sentiment was echoed at the "Advancing AI" event, where industry giants showcased their use of AMD's Instinct MI300X accelerators for cloud and enterprise AI infrastructure, reflecting growing adoption and trust in AMD's offerings.

Moreover, AMD's efforts to expand its AI software ecosystem, exemplified by the ROCm™ 6 software stack optimized for generative AI, have garnered support from key players like Databricks and OpenAI. The collaboration could position AMD as a preferred choice for AI solutions, further enhancing its competitive edge.

The company's commitment to innovation further extends to hardware, with the integration of neural processing units (NPUs) in its Ryzen 8040 Series mobile processors. The advancement, delivering up to 1.6x more AI processing performance, has garnered interest from leading PC OEMs, with new laptops featuring AMD Ryzen 8040 Series processors set to hit the market soon.

Additionally, strategic partnerships, including the one with Microsoft Corporation (MSFT), underscore AMD's role in enabling new services and computing capabilities across various domains, including cloud computing and AI-capable PCs. Such collaborations validate AMD's technology prowess and ability to drive transformative business outcomes.

Furthermore, its collaboration with JR Kyushu Railway Company highlights its foray into AI-driven automation, revolutionizing traditional track inspection methods with the AMD Kria™ K26 System-on-Module.

The deployment highlights AMD's commitment to innovation and its potential to address real-world challenges with AI-powered solutions, further solidifying its position as a critical player in the evolving tech landscape.

AMD’s Robust Financial Performance

AMD's fiscal 2023 fourth quarter showcased remarkable growth across its Data Center and Embedded segments, driven by significant developments. Notably, the company achieved record Data Center segment annual revenue and robust overall growth, buoyed by the rising adoption of Instinct AI accelerators and strong demand for EPYC server CPUs across cloud, enterprise, and AI sectors.

The company’s revenue for the fourth quarter surged by 10% year-over-year to $6.17 billion, fueled by substantial double-digit growth in both the Data Center and Client segments. The remarkable $1.2 billion increase in annual revenue for the Data Center and Embedded segments is of particular significance, which collectively contributed over 50% of the total revenue for 2023.

This surge underlines AMD's success in capturing server market share, driven by the launch of next-generation Instinct AI accelerators and its continued leadership in adaptive computing solutions.

In addition, the company's fourth-quarter non-GAAP gross profit grew 10% year-over-year to $3.13 billion, while operating income was up 12% from the year-ago value to $1.41 billion. Similarly, its non-GAAP net income and non-GAAP EPS grew 12% from the prior year's period to $1.25 billion and $0.77, respectively.

AMD and NVDA Growth Comparison

AMD's recent strides toward securing a spot in the trillion-dollar club spell trouble for its rival, NVDA. AMD's robust growth trajectory seems poised to challenge and potentially surpass NVDA in the market. This is primarily due to the recent events in the stock market, which have raised eyebrows.

NVDA's stock took a significant hit last week, tumbling into correction territory with a 10% decline from its recent peak. This downturn comes at a crucial juncture, highlighting potential vulnerabilities for the market darling.

Adding to NVDA's woes is the persistent supply constraint plaguing its H100 GPU chips. Despite soaring demand, the company has struggled to meet supply requirements for months, leading to significant challenges in fulfilling orders. The severity of this supply-demand mismatch was underscored by Tesla, Inc. (TSLA) CEO Elon Musk's admission that even TSLA couldn't acquire the chips quickly enough.

Furthermore, the lackluster performance of NVDA's stock from July 2023 to October 2023, as highlighted by Evercore ISI strategist Julian Emanuel, serves as a cautionary tale. This stagnant period failed to generate momentum for NVDA and catalyzed broader market downturns, impacting the S&P 500 index.

In light of AMD's upward trajectory and NVDA's recent setbacks, it's evident that the competitive landscape in the semiconductor industry is undergoing a significant shift, with AMD emerging as a formidable challenger to NVDA's dominance.

Furthermore, in a Texas federal court, NVIDIA was sued for trademark infringement by the financial technology company Modulus Financial Engineering over the chipmaker's Modulus artificial intelligence software.

Modulus Financial asked the U.S. District Court for the Western District of Texas to force NVDA to stop using the Modulus name, which it said would create consumer confusion with its AI-related software.

Bottom Line

Investor interest in AI has reached a fever pitch, driving substantial gains in the stock market throughout 2023 and 2024. With the global AI market valued at $515.31 billion in 2023 and projected to reach $2.74 trillion by 2032, the industry's growth trajectory is undeniable.

The surge in AI is fueled by several factors, including the proliferation of AI applications, increased partnerships, the emergence of small-scale AI platforms, and the evolving needs of businesses to navigate complexities. AMD, recognizing the immense potential, is heavily investing in the sector and forging lucrative partnerships to solidify its position in the AI landscape.

Moreover, with potent AI accelerator designs and leveraging third-party manufacturing solutions, AMD is poised to capture significant market share in the AI space, potentially elevating its status in investor discussions alongside NVDA.

Further, AMD's discounted valuation compared to NVDA presents an attractive investment opportunity, further bolstering its appeal as a solid buy in the market. Regarding forward EV/Sales, AMD is trading at 10.15x, 47.5% lower than NVDA's 19.34x. Also, the stock’s trailing-12-month Price/Sales and Price to Book are 11.62x and 4.72x compared to NVDA's 35.74x and 50.56x, respectively.

Against this backdrop, AMD stands well-positioned to make it into the trillion-dollar club and surpass NVDA with its innovative product launches, strategic investments and partnerships, and market dominance.

AMZN Enters the Dow: What It Means for Investors and the Market

The Dow Jones Industrial Average (DJIA), often referred to as the Dow, is one of the most enduring and esteemed price-weighted indices, overseeing 30 prominent publicly traded companies listed on both the NYSE and the NASDAQ.

Throughout its history, the Dow has functioned as a reliable gauge of the overall health of the U.S. stock market and economy. The companies featured in the Dow are often regarded as stalwarts in their respective industries.

However, over the past years, the absence of a few major tech giants within the index has led to its downfall. As the S&P 500 takes the lead, questions have been raised on Dow’s ability to correctly capture the essence of Artificial Intelligence’s (AI) impact on the U.S. economy.

In 2023, the Dow recorded a 13.7% increase, whereas the S&P 500 saw a 24.2% surge. Looking at year-to-date performance, the S&P 500 has risen by about 7%, compared to the Dow's increase of over 2%.

The performance gap between the indexes can be largely attributed to the S&P 500's heavier focus on big tech stocks, which have emerged as significant market winners. The anticipation surrounding the Federal Reserve's potential shift from rate hikes to cuts, coupled with the AI frenzy, propelled tech stocks to unprecedented heights last year.

Out of the few major big tech players, namely Alphabet Inc. (GOOGL),, Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms, Inc. (META), Microsoft Corporation (MSFT), and NVIDIA Corporation (NVDA), only two tech titans MSFT and AAPL were included in the Dow up until last month.

However, considering the Dow’s lagging performance compared to the S&P 500 and its lack of exposure to big tech stocks, in a recent bold move to revitalize its performance and embrace the tech wave, Dow replaced pharmaceutical retailer Walgreens Boots Alliance, Inc. (WBA) with e-commerce giant, AMZN. Among the 30 blue chip companies listed in the Dow, AMZN holds the 17th position by weight.

But What Led to AMZN's Inclusion Into the Dow?

AMZN's inclusion in the Dow Jones index can be attributed to a three-for-one split implemented by Walmart, Inc. (WMT), also in the Dow. Companies within the Dow are weighted according to their stock price. Therefore, WMT's stock split, which effectively reduces its price and thereby its weight within the index, necessitated a rebalancing. Consequently, the Dow opted to incorporate AMZN into its listing.

S&P Dow Jones Indices indicates that this adjustment mirrors the evolving landscape of the American economy, which is expected to amplify consumer retail exposure alongside other business sectors within the Dow. Beyond AMZN's retail aspect, its addition to the Dow could elevate the index's performance, propelled by AMZN's increasing influence in the tech sector.

Commanding a market cap of over $1.80 trillion, AMZN has spread its wings across various industries over the past few years. While renowned for its remarkable retail operations, its substantial advancements in the entertainment landscape through Amazon Prime Video, Amazon Music, Prime Gaming, and Twitch underscore its versatility and impact.

Moreover, the company has also achieved notable progress in the tech space, particularly with its Amazon Web Services (AWS) segment, capitalizing on the surge in demand for Cloud and AI services. According to Statista, AWS generated $90.80 billion with its cloud services in 2023.

Additionally, buoyed by a record-breaking holiday shopping season, AMZN witnessed solid year-over-year growth in both its topline and bottom-line figures in the final quarter of 2023. Meanwhile, its AWS segment, which recorded a net sale of $24.20 billion, was more profitable than analysts had predicted and accounted for 14% of AMZN’s overall revenue in the same quarter.

With AMZN’s focus on fortifying its foothold in the realm of AI, the company, during the fourth quarter, launched the Q chatbot for developers and nontechnical corporate workers, alongside unveiling its partnership with chip kingpin NVDA to provide cutting-edge infrastructure, software, and services, aimed at supporting customers' advancements in generative AI.

On the earnings call, AMZN’s CEO Andy Jassy emphasized that generative AI remains a focal point for AMZN, with ongoing dedication and investment. He highlighted its potential to revolutionize numerous customer experiences and processes, foreseeing it as a significant driver of tens of billions of dollars in revenue for AMZN in the coming years.

Bottom Line

Despite the Dow lagging behind the S&P 500 index, inclusion in the Dow serves as a clear signal to investors, analysts, and the financial media, indicating a company's status as a stalwart of the American economy.

That being said, AMZN’s inclusion among the top 30 blue-chip companies comes as no surprise, considering the company’s strong financial prowess, relentless success, and diverse portfolio spanning retail, entertainment, and technology.

In addition, AMZN's robust financial performance in its last reported quarter, along with its recent partnerships with industry giants such as NVDA and product launches to fortify its position in the realm of AI, underscore its potential for further expansion and innovation.

Looking forward, Wall Street is buzzing with high expectations for the company’s fiscal first-quarter earnings, forecasting an impressive 11.9% year-over-year revenue climb to $142.48 billion, alongside a remarkable 171.6% year-over-year EPS surge to $0.84.

Furthermore, driven by AMZN’s competitive advantages, including its strong positions in logistics, e-commerce, and cloud computing, Wall Street projects the company to achieve revenue growth close to 10% by 2028. Street also anticipates slight increases in its EBITDA margin, reaching 21.2% by the end of 2028, and predicts AMNZ's market cap will reach $3 trillion over the next five years.

With such bullish sentiment echoed by analysts for the company’s future prospects coupled with its inclusion in the prestigious Dow index, institutional investors are flocking to AMZN shares, with 2,532 holders ramping up their stakes, reaching a total of 312,340,167 shares. Moreover, 428 institutions have taken new positions (32,292,371 shares).

This surge in institutional investment speaks volumes about the growing confidence in AMZN's future prospects. In light of all the encouraging aforementioned factors, AMZN emerges as a compelling investment opportunity.

Is Best Buy (BBY) Flashing a Red Alert for Investors?

Best Buy Co., Inc. (BBY), the electronic retailing giant, reported better-than-expected fourth-quarter 2024 earnings and revenue. The recent report broke a string of eight straight year-over-year EPS declines. The retailer posted an EPS of $2.72 in the quarter that ended January 28, 2024, up 4% from the prior year’s quarter. That exceeded analysts’ earnings estimate of $2.50 per share.

Although BBY experienced stagnant revenue in the fourth quarter of 2024, dropping by less than 1% to $14.65 billion, it surpassed analysts’ expectations of $14.56 billion. 

However, for the full year 2024, the company recorded $43.45 billion in revenue, marking a 6.1% year-over-year decrease. Moreover, its operating income experienced a 12.3% year-over-year decline to $1.57 billion, while net earnings dropped by 12.5% to $1.24 billion from the previous year’s $1.42 billion.

This scenario likely stems from Americans contending with elevated prices for essentials such as rent and specific foods despite an overall decrease in the inflation rate. In the meantime, acquiring loans for appliances, cars, and homes or utilizing credit cards remains accompanied by higher costs.

Persistent challenges in the housing market have prompted consumers to scale back their purchases of high-value items. Additionally, there’s a sustained preference for experiential spending on activities such as concerts and travel. Consequently, consumers are exercising caution when it comes to expenditures on gadgets and other products.

The current scenario presents a stark contrast to BBY’s sales during the peak of the pandemic, characterized by heightened consumer spending on electronics. Shoppers indulged in purchases to facilitate remote work and assist with virtual learning for their children. Additionally, government stimulus checks played a significant role in driving this spending spree.

Furthermore, Neil Saunders, managing director of GlobalData, said, “Over the final quarter, the market was soft, but Best Buy underperformed it and lost share.”

Particularly evident was this trend in appliances, where competitors such as The Home Depot, Inc. (HD) fared significantly better, and in consumer electronics and computing, where companies such as Apple Inc. (AAPL) and, Inc. (AMZN) demonstrated superior performance.

Also, BBY incurred $169 million in fourth-quarter restructuring charges linked to employee layoffs. Looking forward, BBY anticipates approximately $10 million to $30 million in additional restructuring-related charges for fiscal year 2025.

This restructuring is intended to “right-size resources to better align with the company’s revenue outlook for FY25,” among other goals. 

Concurrently, Best Buy’s CFO Matt Bilunas stated that, as part of their ongoing strategy, they would persist in closing traditional stores as they conduct thorough evaluations upon lease renewals. “In fiscal '24, we closed 24 stores,” he noted. “And in fiscal '25, we expect to close 10 to 15 stores.”

So, amid flat revenue in the fourth quarter, the retailer is braced for layoffs and store closures. Despite this, BBY’s stock approaches the Buy point on its earnings surprise. Shares of BBY have gained nearly 6% over the past month.

Meanwhile, analysts responded to the electronic retailer giant’s better-than-anticipated earnings by increasing their share price targets. Truist analyst Scott Ciccarelli raised the firm’s price target on BBY to $87 from $68.

Also, Telsey Advisory Group analyst Joseph Feldman increased his price target for Best Buy to $85 per share from $75 while maintaining a Market Perform rating on the stock. Feldman said Best Buy’s EPS exceeded the firm’s estimates, driven by better-than-expected sales and profitability.

However, fourth-quarter comparable sales were still bleak given a challenging industry and macro environment, he added. Overall, Feldman stated, Best Buy has a sound business strategy and solid management team while being ahead of its peers in its omnichannel capabilities, usage of real estate, and new revenue streams.

Furthermore, Jefferies increased the firm’s price target on BBY from $89 to $95 while maintaining a Buy rating on the shares after it called “slightly better” fourth-quarter results.

Bottom Line

Maintaining such extensive inventory can incur significant costs, particularly considering BBY’s operation of more than 1,000 stores solely in the United States. The array of expensive electronic products, often swiftly rendered obsolete by the rapid pace of technological advancement, pose liabilities until sold and ensuring consistent merchandise turnover can pose challenges.

Hence, the retailer shuttered 24 stores last year and intends to continue closing underperforming ones. The company is also strategically removing certain items from shelves at remaining stores, redirecting focus towards higher-margin products. The retailer plans to discontinue sales of DVDs and other physical media products to revamp its tech centers and allocate space for more lucrative tech items.

Corie Sue Barry, BBY’s CEO & Director, clarified, “We’re not remodeling every store in the fleet, but we’re enhancing the shopping experience to embody the excitement and innovation that technology offers.”

She emphasized the removal of outdated technology that no longer significantly contributes to its bottom line.  “And so, removing physical media, updating mobile, digital imaging, computing, tablets, and smart home, I think that allows us to make that center of the store really feel a bit more vibrant and exciting. And so, the goal here is not that every single store is going to look like an Experience Store.”

This entails embracing agility in previously unexplored markets and creating space for reimagined store concepts. BBY is reassessing its large store formats, which have functioned more as display-centric warehouses than profit-driven entities.

The company also plans to launch additional outlet centers and novel formats to test two key concepts. Firstly, small locations will be opened in selected outstate markets lacking prior physical presence, gauging the potential to capture untapped market share.

Secondly, Best Buy will explore transitioning from large-format to small-format stores nearby, aiming to enhance convenience and retain physical store presence effectively. Also, the retailer is increasingly investing in AI to improve operational efficiency and customer service.

BBY expects sales in the computing category to strengthen, demonstrating growth for the full year 2025. This projection is based on the increasing momentum of early replacement and upgrade cycles, alongside the release of new products featuring advanced AI capabilities throughout the year.

Wedbush analyst Basham has echoed similar sentiments, noting, “There are building signs of stabilization in consumer electronics, with laptop and TV unit sales again increasing for [Best Buy] in 4Q24, and replacement and innovation cycles likely to build from here.”

Also, the implementation of workforce reductions and cost-saving measures within the company aims to free up capital for reinvestment, particularly in emerging areas like artificial intelligence. This strategy is designed to position the company strategically for an anticipated industry rebound.

Additionally, in January 2024, the retailer announced its collaboration with Bell Canada to run 165 small-format electronics stores. These BBY Express outlets will provide consumer electronics alongside phone, internet, and TV services. The launch of these express locations is anticipated in the second half of this year.

The company anticipates growth opportunities in healthcare as well. Although still a small segment compared to its core business, BBY’s Health sales are projected to grow faster than the core business by fiscal 2025. This growth, coupled with cost synergies from integrating acquired companies, is forecasted to drive a 10-basis points expansion in enterprise operating income rate.

BBY anticipates sales for the current year 2025 to range between $41.30 billion and $42.60 billion, while analysts are projecting $42.09 billion. Moreover, the company’s earnings per share for the year are expected to range from $5.75 to $6.20, compared to analysts’ expectations of $6.06.

Therefore, considering BBY’s strategic adjustments, such as optimizing store layouts, exiting low-margin product lines, and venturing into promising sectors like healthcare, it’s advisable to hold onto its shares. Positive industry sentiments, anticipated sales growth, and innovative collaborations indicate potential for future profitability and shareholder value.

Is It Time to Rethink Investing in the Magnificent 7 Stocks?

The largest companies in the S&P 500 Index have witnessed “unrelenting” outperformance over the past decade. However, history shows that mega-cap stocks typically fail to keep up their market-beating run, as per the asset allocation team at Jeremy Grantham’s GMO, an investment management firm.

By some measures, “big is generally anything but beautiful,” GMO’s co-head of asset allocation, Ben Inker and team member John Pease, said in the investment firm’s first-quarter 2024 letter to clients. “Nine of the top 10 have underperformed on average.”

The biggest stocks usually become the biggest by “way of becoming expensive, and this anti-value tilt has historically been quite costly, explaining most of these companies’ poor relative returns,” said Ben Inker and John Pease. “Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year.” 

“But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average,” they wrote.

Magnificent And Concentrated

According to the GMO team, the S&P 500 has become an increasingly concentrated index over the past decade, with the top seven stocks, Microsoft Corporation (MSFT), Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Alphabet Inc. (GOOGL),, Inc. (AMZN), Meta Platforms, Inc. (META), and Tesla, Inc. (TSLA), now have surged to 28% of the total, from 13% a decade ago, as their returns are outpacing that of the average stock in the index.

These Big Tech stocks, also known as the Magnificent Seven, are being closely watched by investors after skyrocketing in 2023.

“Biasing portfolios against the very largest stocks” over the past decade has been “a disaster,” particularly last year; however, it’s been “lucrative” for most of history, as per the GMO letter. 

Despite recent trends indicating their continued growth and resilience, betting against mega-cap stocks or engaging in short selling or other strategies that profit from a decline in the stock prices of these largest companies has historically been considered a profitable strategy for reasons including valuation concerns, market cycles and mean reversion, and regulatory and antitrust risks.

“The break in the consistent downward trend of cap-weighted underperformance reflects the magnificence of the Magnificent Seven,” the letter stated.  “In 2023, as their monicker became part of the common lexicon, they outperformed the S&P 500 by an almost unimaginable 60%.”

The S&P 500 index gained about 24.2% in 2023, climbing on the back of Big Tech’s gains. Big Tech stocks’ gains were primarily driven by immense investor enthusiasm surrounding AI.

The broad S&P 500 index briefly crossed 5,000 during intraday for the first time in history last Thursday, and on Friday, it ended above the level, marking its tenth record close of 2024 at 5,026. That puts the stock market benchmark up more than 5% since the start of the year, on top of its impressive 24% gain last year.

“As far as mega caps go, they have been practically unparalleled in their outperformance” over the past decade, but 2022 was the only year when they failed to outperform the market, added Inker and Pease. In 2022, the Magnificent Seven saw significant losses of nearly 40%, mainly due to monetary tightening and interest rate hikes that adversely impacted tech-related stocks.

“This performance came in part from the unusual cheapness of mega caps at the start of the decade,” as per the letter. For instance, Apple, Microsoft, and Google boasted a combined P/E ratio of 15x in 2013; in contrast, the market’s P/E was around 25% higher.

Also, these companies managed to grow earnings “at a breakneck pace.” Inker and Pease said, “Microsoft and Amazon did so by reinventing themselves. Apple, Alphabet, Meta, Nvidia, and Tesla took over their primary industries. The medium-sized businesses among them became huge, and the large ones became giants.” 

“Ten years ago, the index was more than twice as diversified,” they wrote. “We have never seen – over any 10-year period – a decline (or increase) in diversification of the magnitude we have just witnessed.”

Comprehensive Analysis of the Magnificent Seven Stocks:

Microsoft Corporation (MSFT)

With a market cap of $3.02 trillion, Microsoft is a leading software company that operates through Productivity and Business Processes; Intelligent Cloud; and More Personal Computing segments.

In terms of forward non-GAAP P/E, MSFT is trading at 35.03x, 36.1% higher than the industry average of 25.74x. The stock’s forward Price/Sales of 12.46x is 319.8% higher than the industry average of 2.97x. Likewise, its forward Price/Book of 11.28x is 172.2% higher than the industry average of 4.15x.

MSFT is considered relatively expensive by some valuation metrics compared to its industry peers. But it’s essential to consider that what might appear costly based on traditional valuation metrics may be justified by the company’s solid fundamentals, growth trajectory, and competitive advantages.

During the fiscal 2024 second quarter that ended December 31, 2023, MSFT’s total revenue came in at $62.02 billion, beating the analysts’ estimate of $61.13 billion. That was up 17.6% from the previous year’s quarter. Its gross margin grew 20.2% from the year-ago value to $42.40 billion.

In addition, the company’s operating income increased 32.5% year-over-year to $27.03 billion. Its net income rose 33.2% from the prior year’s period to $21.87 billion. Microsoft reported earnings per share of $2.93, compared to the consensus estimate of $2.20, and up 33.2% year-over-year.

For the third quarter of 2024, Microsoft expects revenue between $60 billion and $61 billion. The software maker sees lower-than-expected cost of revenue and operating expenses during the quarter.

Analysts expect MSFT’s revenue and EPS for the third quarter ending March 2024 to increase 15.2% and 15.5% year-over-year to $60.87 billion and $2.83, respectively. Further, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 14.2% and 13.7% from the previous year to $278.98 billion and $13.29, respectively.

Shares of MSFT have surged nearly 26% over the past six months and more than 50% over the past year.

Apple Inc. (AAPL)

AAPL is a leading tech company with a market cap of $2.84 trillion. Its primary products and services include iPhone, Mac, iPad, Apple Watch, and digital services, such as the App Store, Apple Music, Apple TV+, and AppleCare, among others.

In terms of forward non-GAAP P/E, AAPL is trading at 28.10x, 9.1% higher than the industry average of 25.74x. Its forward EV/Sales of 7.15x is 141.4% higher than the industry average of 2.96x. Also, its forward Price/Sales of 7.32x is 146.8% higher than the industry average of 2.97x.

Along with valuation metrics, determining whether AAPL is expensive or cheap requires analysis of other factors, such as growth prospects and market conditions.

AAPL’s net sales increased 2.1% year-over-year to $119.58 billion in the fiscal 2024 first quarter that ended December 30, 2023. Its operating income grew 12.1% year-over-year to $40.37 billion. The tech giant’s net income and earnings per share came in at $33.92 billion and $2.18, up 13.1% and 16% from the prior year’s period, respectively.

“Today Apple is reporting revenue growth for the December quarter fueled by iPhone sales, and an all-time revenue record in Services,” said Tim Cook, Apple’s CEO, in its last earnings release. “We are pleased to announce that our installed base of active devices has now surpassed 2.2 billion, reaching an all-time high across all products and geographic segments.”

Street expects AAPL’s revenue and EPS for the fiscal year (ending September 2024) to grow 1.4% and 6.9% year-over-year to $388.47 billion and $6.55, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 6.2% and 9% from the prior year to $412.46 billion and $7.14, respectively.

AAPL’s stock has gained more than 6% over the past six months and approximately 18% over the past year.

NVIDIA Corporation (NVDA)

NVDA, with a $1.80 trillion market cap, NVDA is a prominent tech company that specializes in graphics processing units (GPUs), AI, and semiconductor technologies. It serves the gaming, data center, automotive, and professional visualization industries.

NVDA’s forward non-GAAP P/E of 58.79x is 127.5% higher than the 25.85x industry average. Moreover, the stock’s forward Price/Sales and Price/Book multiples of 30.33 and 40.86 are significantly higher than the respective industry averages of 2.99 and 4.17. NVIDIA is trading at a premium relative to its industry peers.

If NVDA’s growth prospects are strong, investors may be willing to pay a premium for the stock despite its higher valuation multiples.

During the fiscal 2024 third quarter ended October 29, 2023, NVIDIA posted a record revenue of $18.12 billion, an increase of 206% from the prior year’s period. Its non-GAAP operating income rose 652% year-over-year to $11.56 billion. Also, the company’s non-GAAP net income and non-GAAP EPS were $10.02 billion and $4.02, up 588% and 593% year-over-year, respectively.

For the fiscal year ending January 2024, the consensus revenue and EPS estimates of $59.18 billion and $12.36 indicate an improvement of 119.4% and 270.1% year-over-year, respectively. Further, analysts expect NVDA’s revenue and EPS for the fiscal year 2025 to increase 58.2% and $21.18 year-over-year to $93.60 billion and $21.18, respectively.

The stock has climbed more than 65% over the past six months and 218% over the past year.

Alphabet Inc. (GOOGL)

With a market cap of $1.78 trillion, GOOGL is a tech giant renowned for its internet-related products and services. Its business segments include Google Services; Google Cloud; and Other Bets. The company continues to maintain its dominance in the global online search market, boasting more than 90% market share, according to SimilarWeb data.

In terms of forward non-GAAP P/E, GOOGL is trading at 21.11x, 37.7% higher than the industry average of 15.33x. The stock’s forward Price/Sales of 5.18x is 315% higher than the industry average of 1.25x. Similarly, its forward Price/Book of 5.19x is 152.9% higher than the industry average of 2.05x. In addition to valuation metrics, assessing GOOGL’s growth prospects is crucial.

In the fourth quarter that ended December 31, 2023, GOOGL’s revenues increased 13.5% year-over-year to $86.31 billion. Its operating income grew 30.5% from the year-ago value to $23.70 billion. In addition, the company’s net income and EPS rose 51.8% and 56.2% from the prior year’s quarter to $20.69 billion and $1.64, respectively.

Street expects GOOGL’s revenue for the fiscal year 2024 to increase 11.4% year-over-year to $342.41 billion. Likewise, the consensus EPS estimate of $5.75 for the current year indicates a 16.6% rise from the prior year. Moreover, the company surpassed its consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Furthermore, the tech company’s revenue and EPS are estimated to grow 10.5% and 15.5% year-over-year to $378.35 billion and $7.81, respectively, for the fiscal year ending December 2025.

GOOGL’s shares are up more than 10% over the past six months and nearly 45% over the past year., Inc. (AMZN)

With a market capitalization of $1.76 trillion, AMZN has grown to become one of the most influential tech companies, offering a wide range of products and services in areas including e-commerce, cloud computing, digital streaming, and AI. Its products and services include, the world’s largest online retailer; Amazon Web Services (AWS); Amazon Prime, a subscription service; and more.

Amazon is relatively expensive compared to its industry peers. AMZN’s forward non-GAAP P/E of 40.50x is 155.3% higher than the 15.87x industry average. The stock’s forward Price/Sales and Price/Book multiples of 2.75 and 6.36 are considerably higher than the respective industry averages of 0.95 and 2.66.

Now, let’s talk about the company’s growth prospects. AMZN’s total net sales increased 13.9% year-over-year to $169.96 billion for the fourth quarter that ended December 31, 2023. Its operating income grew 382.6% from the year-ago value to $13.21 billion. The company’s net income and EPS significantly grew year-over-year to $10.62 billion and $1, respectively.

Analysts expect AMZN’s revenue for the fiscal year 2024 to increase 11.6% year-over-year to $641.44 billion. The company’s EPS for the ongoing year is expected to grow 44.6% from the previous year to $4.19. Also, the company topped consensus revenue and EPS estimates in each of the trailing four quarters.

AMZN’s stock has surged nearly 23% over the past six months and more than 65% over the past year.

Meta Platforms, Inc. (META)

Formerly known as Facebook, Inc., META, with a market cap of $1.23 trillion, is a technology conglomerate with key products, including Facebook, Instagram, WhatsApp, and Messenger. 

In terms of forward non-GAAP P/E, META is trading at 28.10x, 9.1% higher than the industry average of 25.74x. Its forward EV/Sales of 7.15x is 141.4% higher than the industry average of 2.96x. Also, its forward Price/Sales of 7.32x is 146.8% higher than the industry average of 2.97x.

META posted revenue of $39.17 billion for the fourth quarter that ended December 31, 2023, up 24.7% year-over-year. Its income from operations rose 156% year-over-year to $16.38 billion. Its net income grew 201.3% from the year-ago value to $14.02 billion. The company reported earnings per share attributable to Class A and Class B common stockholders of $5.33, up 202.8% year-over-year.

For the first quarter of 2024, META expects total revenue to be in the range of $34.50-37 billion. For the full year 2024, the management expects total expenses to be in the range of $94-99 billion, unchanged from the prior outlook.

Street expects Meta’s revenue and EPS for the fiscal year (ending December 2024) to grow 17.4% and 32.4% year-over-year to $158.39 billion and $19.69, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 12.2% and 15.2% from the previous year to $177.68 billion and $22.96, respectively.

The stock has gained approximately 45% over the past three months and more than 170% over the past year.

Tesla, Inc. (TSLA)

With a $638.39 billion market cap, TSLA designs, develops, manufactures, leases, and sells electric vehicles (EVs) and energy generation and storage systems internationally. The company operates in two segments: Automotive; and Energy Generation and Storage. 

In terms of forward non-GAAP P/E, TSLA is trading at 62.61x, 294.6% higher than the industry average of 15.87x. The stock’s forward Price/Sales of 5.75x is 507.9% higher than the industry average of 0.95x. Likewise, its forward Price/Cash Flow of 48.16x is 282.9% higher than the industry average of 10.54x. Along with valuation metrics, assessing TSLA’s fundamentals and growth prospects is essential.

During the fourth quarter that ended December 31, 2023, TSLA’s revenues decreased 3% year-over-year to $25.17 billion. Its income from operations declined 47% from the year-ago value to $2.06 billion. Its adjusted EBITDA was $3.95 billion, down 27% from the prior year’s period.

In addition, the company’s non-GAAP net income and EPS declined 39% and 40% from the prior year’s quarter to $2.49 billion and $0.71, respectively. But its free cash flow came in at $2.06 billion, an increase of 45% year-over-year.

Analysts expect TSLA’s revenue for the first quarter (ending March 2024) to increase 9.3% year-over-year to $25.49 billion. However, the consensus EPS estimate of $0.68 for the current quarter indicates a 20.5% decline year-over-year. Additionally, the company missed consensus revenue and EPS estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year 2024, the company’s revenue and EPS are expected to grow 14.7% and 2.6% from the prior year to $110.97 billion and $3.20, respectively. TSLA’s shares have surged nearly 20% over the past nine months.

Bottom Line

Over the past decades, mega-cap stocks have demonstrated periods of outperformance and underperformance, reflecting several shifts in market dynamics and economic conditions.

While the largest companies in the S&P 500 have seen “unrelenting” outperformance over the past decade, history shows the biggest stocks generally fail to keep up their market-beating run. Citing data from 1957-2023, co-head of asset allocation Ben Inker and team member John Pease found that nine of the ten largest S&P 500 stocks underperformed on average.

“The historical underperformance of the top 10 comes down to the two main sources of return – valuation expansion and fundamental growth – being harder to achieve than for your average company. The largest stocks generally become the largest by way of becoming expensive, and this anti-value tilt has historically been quite costly, explaining most of these companies’ poor relative returns,” Inker and Pease wrote.

Since 1957, the ten biggest stocks in the S&P 500 underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. However, the last decade seems to notably depart from that downtrend, with the largest ten outperforming by an impressive 4.9% per year on average.

So far, in 2024, the following four stocks in the Magnificent Seven are beating the S&P 500: Nvidia, Meta, Amazon, and Microsoft.

For investors considering buying, holding, or selling the Magnificent Seven stocks, it is crucial to assess each stock individually based on its fundamentals, valuation, growth prospects, and risk factors.

Unraveling MSFT's Market Dominance: Investor Strategies Amid Record Valuation

Microsoft Corporation (MSFT) achieved an exceptional milestone when it ended last week with a market capitalization of $3.125 trillion, becoming the world’s most valuable publicly traded company ever.

The tech company surpassed the previous record set by Apple Inc. (AAPL) when it reached a market cap of $3.09 trillion in July, as per Dow Jones Market Data. The iPhone marker ended Friday with a $2.916 trillion market cap.

MSFT’s stock has surged more than 28% over the past six months and nearly 52% over the past year, thanks to immense enthusiasm around its AI potential.

Microsoft Market Cap Milestone: Implications and Opportunities

MSFT’s historic market capitalization milestone holds significant implications for the technology sector, investors, and the global economy. To begin with, it underscores the rising dominance of large tech companies within the stock market and the broader economy.

As Microsoft becomes one of the world’s most valuable companies, it solidifies the technology sector’s influence and sheds light on the importance of innovation and digital transformation across several industries. The company’s growing investments in AI, cybersecurity, and sustainable technologies further contribute to global competitiveness and economic growth.

For investors, MSFT’s recent milestone signals opportunities for potential growth and value creation. It offers investors exposure to a diverse range of high-growth segments, such as AI, cloud computing, gaming, and productivity software. This broad business portfolio allows investors to benefit from Microsoft’s continued innovation, market leadership, and resilience in different economic conditions.

Moreover, the tech giant’s solid financial position and cash flow generation provide stability and potential for dividend growth, making it extremely attractive to income-focused investors seeking stable returns. In addition, MSFT’s strategic partnerships and acquisitions may create opportunities for investors to capitalize on synergies, expansion into new markets, and completive advantages.

In October 2023, Microsoft completed the acquisition of Activision Blizzard, a well-known video game publisher. This deal provides MSFT with a hefty portfolio of video game franchises, including Call of Duty, Crash Bandicoot, StarCraft, and Warcraft. This acquisition aligns with the company’s strategic focus on gaming and positions it for long-term growth and leadership in the gaming industry.

Talking about the ripple effects of Microsoft’s milestone, competitors may intensify their efforts to innovate, compete, or collaborate with the company in response to its market dominance and strategic moves. Consumers may benefit considerably from increased competition and enhanced accessibility of innovative tech products and services, boosting further tech adoption in daily life.

Also, policymakers may scrutinize large tech firms’ market power, data privacy practices, and potential antitrust concerns, shaping regulatory frameworks and industry dynamics.

Now, let’s discuss several factors that could impact MSFT’s performance in the near term:

Continued Progress In AI

“We’ve moved from talking about AI to applying AI at scale,” Satya Nadella, chairman and CEO of Microsoft, said in the last earnings release. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”

Over the past year, Microsoft has made significant advancements in integrating AI into its products and tools.

In January 2023, Microsoft announced a multiyear, multibillion-dollar investment with ChatGPT-maker OpenAI. The deal marked the third phase of the partnership between the two companies after MSFT’s previous investments in 2019 and 2021. The renewed partnership would accelerate breakthroughs in AI and help the companies commercialize advanced technologies in the future.

“We formed our partnership with OpenAI around a shared ambition to responsibly advance cutting-edge AI research and democratize AI as a new technology platform,” said CEO Satya Nadella.

In February, MSFT launched an AI-powered Bing search engine and Edge browser with built-in support for OpenAI’s ChatGPT to help people get more from search and the web. The new Bing search version could deliver better searches, more accurate answers, a new chat experience, and the ability to generate content.

In March, the company further announced the addition of AI tools to its Office productivity applications and introduced a feature called Microsoft 365 Copilot. The Copilot feature uses next-gen AI to automate and simplify tasks and offer suggestions. Starting September 26, Copilot begins to roll out its early form as part of its free update to Windows 11.

Beginning November 1, Microsoft 365 Copilot is generally available for enterprise customers, along with Microsoft 365 Chat. Also, this AI-powered Copilot is added to the company’s cybersecurity offerings and GitHub service for software developers.

On November 8, Microsoft-owned GitHub introduced a Copilot assistant that can assist developers in working with their employers’ internal code, priced at $39 per person a month. This new launch might help the company boost profitability in its cloud business unit by taking advantage of its partner OpenAI’s technology.

On November 15, the tech giant debuted its first custom AI chip. At its Ignite conference, MSFT said the chip, Maia 100, is the first in its planned Azure Maia AI accelerator series. In addition to the Maia 100, the company introduced its first custom Arm-based Azure Cobalt, a cloud-native chip optimized for performance, power efficiency and cost-effectiveness for general-purpose workloads.

The chip will be used for cloud-based training and inferencing for AI models. With these chips, Microsoft is on par with rivals Alphabet Inc. (GOOGL) and, Inc. (AMZN), which have also developed their custom chips to run competing cloud platforms. MSFT added that it partnered with ChatGPT developer OpenAI to test its Maia 100 accelerator and will use those lessons to build future chips.

On January 11, 2024, Microsoft announced new generative AI and data solutions and capabilities for retailers. The company offers personalized shopping experiences through copilot templates on Azure OpenAI Service, retail data solutions in Microsoft Fabric, copilot features in Microsoft Dynamics 365 Customer Insights, and the Retail Media Creative Studio.

Robust Last Reported Financials

For the fiscal 2024 second quarter that ended December 31, 2023, MSFT reported total revenue of $62.02 billion, surpassing the analysts’ estimate of $61.13 billion. That was up 17.6% from the previous year’s quarter.

Microsoft’s Intelligent Cloud segment generated $25.88 billion in revenue, an increase of 20.3% year-over-year. The division comprises Azure, public cloud, SQL Server, Nuance, Windows Server, GitHub, and enterprise services. Within the segment, revenue from Azure and other cloud services rose 30%.

Six points of the Azure and other cloud services growth were tied to AI, Amy Hood, MSFT’s finance chief, said on a conference call with analysts.

Also, MSFT’s Productivity and Business Processes segment posted revenue of $18.59 billion, up 13.2% year-over-year. This business unit includes Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The More Personal Computing segment contributed $16.89 billion in revenue, an increase of 18.6%.

The software company’s gross margin rose 20.2% from the year-ago value to $42.40 billion. Its operating income increased 32.5% year-over-year to $27.03 billion. Its net income grew 33.2% from the prior year’s period to $21.87 billion. Microsoft posted earnings per share of $2.93, compared to the consensus estimate of $2.20, and up 33.2% year-over-year.

Furthermore, cash inflows from operations came in at $18.85 billion for the second quarter, an increase of 68.7% year-over-year. As of December 31, 2023, MSFT’s total assets amounted to $470.56 billion, compared to $411.98 billion as of June 30, 2023.

For the fiscal 2024 third quarter, Microsoft expects revenue between $60 billion and $61 billion. The company sees lower-than-expected revenue and operating expenses during the quarter.

Impressive Historical Growth

Over the past three years, MSFT’s revenue grew at a CAGR of 14.1%. Its EBITDA and net income improved at respective CAGRs of 18.1% and 17.2% over the same period. In addition, the company’s EPS increased at a CAGR of 18.1% over the same timeframe, and its levered free cash flow improved at 18.9% CAGR.

Furthermore, the company’s total assets increased at a CAGR of 15.7% over the same period.

Attractive Dividend

On November 28, 2023, MSFT’s Board of Directors approved a quarterly cash dividend of $0.75 per share on the company’s common stock. The dividend is payable on March 14, 2024, to shareholders of record on February 15, 2024. The company pays an annual dividend of $3, translating to a yield of 0.71% at the current share price.

Moreover, MSFT’s dividend payouts have increased at a CAGR of 10.2% over the past five years. Microsoft has raised its dividends for 19 consecutive years.

Optimistic Analyst Estimates

Analysts expect MSFT’s revenue for the third quarter (ending March 2024) to increase 15.2% year-over-year to $60.87 billion. The consensus EPS estimate of $2.83 for the current quarter indicates an improvement of 15.5% year-over-year. Moreover, the company has topped consensus revenue and EPS estimates in all the trailing four quarters, which is remarkable.

For the fiscal year ending June 2024, Street expects Microsoft’s revenue and EPS to grow 15.3% and 19.2% year-over-year to $244.23 billion and $11.69, respectively. Also, the software maker’s revenue and EPS for the fiscal year 2025 are expected to increase 14.2% and 13.7% from the previous year to $278.98 billion and $13.29, respectively.

Solid Profitability

MSFT’s trailing-12-month gross profit margin of 69.81% is 43.2% higher than the 48.76% industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 44.59% and 36.27% are considerably higher than the industry averages of 4.74% and 2.23%, respectively.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 39.17%, 20.77% and 17.54% favorably compared to the respective industry averages of 1.99%, 2.44%, and 0.80%. Also, its trailing-12-month levered FCF margin of 25.78% is 183.4% higher than the industry average of 9.10%.

Analysts Raised Their Microsoft Price Targets

Several Wall Street analysts have raised their price targets on MSFT’s stock. D.A. Davidson analyst Gil Luria added $85 to his Microsoft price target, taking it to a Wall Street high of $500 per share. He seems impressed by the company’s near-term guidance, which highlighted “increasing demand for Microsoft Cloud as well as positive margin expansion even with increasing capital expenditures related to the build-out of their AI infrastructure.”

“Microsoft has continued to show they are a strong share gainer in this new AI landscape, which is largely driven by the company's ability to build compelling generative AI applications throughout their product suite as well as capture new AI-related workloads on Azure,” said Luria.

Meanwhile, CFRA analyst Angel Zino increased the MSFT price target by $35 to $455 a share, citing in part the value created for the company’s Office 365 division with the addition of AI assistant Copilot.

Wolfe Research analyst Alex Zukin reiterated a Buy rating on MSFT on January 30 and set a price target of $510. Alex Zubin has given Microsoft a Buy rating due to several factors, including its strong financial performance and promising growth in key areas.

Further, Jefferies analyst Brent Thill maintained their bullish stance on MSFT stock, giving it a Buy rating on January 26. Thill points to the tech giant’s expected year-over-year constant currency growth, which is projected to grow from 12% to 15%, suggesting that it is poised to achieve these targets with the aid of Activision Blizzard’s contributions.

Additionally, Thill believes that Microsoft is well-poised to benefit from the rising emphasis on AI, which is coupled with favorable cloud trends, underpinning the stock’s upside potential.

Bottom Line

MSFT beat on the top and bottom lines in the second quarter of fiscal 2024, driven by growth in intelligent cloud business. Microsoft has led groundbreaking advances such as partnership with OpenAI and the integration of ChatGPT capabilities into products and tools used to search, collaborate, work, and learn.

Further, as MSFT accelerates into AI, it is rethinking cloud infrastructure to ensure optimization across every layer of the hardware and software stack. The company’s commitment to innovations across various segments like AI, edge computing, and mixed reality positions it for long-term growth and market leadership.

Gartner forecasts worldwide software spending to reach $1.03 trillion in 2024, an increase of 12.7% year-over-year. Robust spending on software among individuals and enterprises will be a primary tailwind for Microsoft. The company’s focus on providing solutions for digital transformation, including AI, cloud-based, cybersecurity, and collaboration tools, aligns with the evolving needs of businesses seeking to modernize their operations.

Moreover, the software maker’s solid financial position, including consistent revenue growth and strong cash flow generation, provides it with enhanced flexibility for strategic investments, acquisitions, and returning value to shareholders via dividends and share buybacks.

Driven by optimism surrounding its AI potential, MSFT’s shares have surged more than 50% over the past 12 months.

Microsoft dethroned Apple as the world’s most valuable company ever, ending last week with a market cap of $3.125. Amid MSFT’s record valuation, investors may adopt different strategies to navigate the market dynamics and capitalize on potential opportunities. Long-term investors may choose to maintain their positions in MSFT, leveraging its solid fundamentals and growth prospects.

In addition, income-focused investors may find Microsoft appealing for its attractive dividend payouts and potential for dividend growth. Tactical traders can also take advantage of short-term trading opportunities in this stock, capitalizing on market sentiment, technical indicators, or macroeconomic trends.