Is NVDA Stock Headed for a Correction?

NVIDIA Corporation (NVDA) has undeniably emerged as a powerhouse in the world of chips, riding high on the wave of the Artificial Intelligence (AI) frenzy. The stock’s remarkable rally of roughly 296% over the past year, propelled by skyrocketing demand for its chips essential to train generative AI models, has fueled its trajectory.

This rapid surge positioned NVDA as the third most valuable company in the world, trailing closely behind tech titans such as Microsoft Corporation (MSFT) and Apple Inc. (AAPL).

With the entire stock market captivated by NVDA’s dramatic ascent and retail investor participation reaching unprecedented levels, Goldman Sachs analysts even went as far as to label NVDA as the “most important stock on planet Earth” ahead of its fourth-quarter earnings call.

But Why Is NVDA Deemed so Important?

In 2023, NVDA witnessed a seismic shift in its trajectory. While previously acclaimed for pioneering cutting-edge computer chip technology, particularly in enhancing graphics-heavy video games, the emergence of AI swiftly boosted these chips to newfound prominence.

The H100, crafted by NVDA, stands as a pinnacle of graphics processing unit (GPU). Tailored exclusively for AI applications, it reigns as the most potent GPU chip available. With an astonishing 80 billion transistors, six times more than its predecessor, the A100 chip, the H100 accelerates data processing to unprecedented speeds, solidifying its position as the unparalleled leader in GPU performance for AI tasks.

The H100’s exceptional performance and capacity to turbocharge AI applications have sparked significant demand, leading to a shortage of these coveted chips. On the other hand, despite the limited availability of the H100, NVDA has already unveiled its successor, the GH200.

Anticipated to surpass the H100 in power and performance, the GH200 is slated to be released by the second quarter of this year.

As the demand for innovative generative AI models soars, major tech players are entering the AI arena, designing their very own generative AI models to boost productivity. Thus, NVDA’s AI chips play a vital role in training and operating these generative AI models.

Moreover, with NVDA’s dominant hold of more than 80% of the global GPU chip market, tech giants find themselves heavily reliant on NVDA to fuel the prowess of their generative AI creations.

Despite such solid demand for NVDA’s offerings, Cathie Wood, the head of ARK Investment Management, pointed out that the GPU shortages, which surged last year alongside the increasing popularity of AI tools like ChatGPT, are now starting to ease.

She highlighted that lead times for GPUs, specifically those manufactured by NVDA, have notably reduced from around eight to 11 months to a mere three to four months. With the possibility of double and triple ordering amid widespread apprehensions about GPU shortages, Wood believes that NVDA might face the pressure of managing surplus inventories.

Consequently, Wood’s concerns over excess inventory spark a pivotal question: Is NVDA headed for a correction?

In response to the rising popularity of AI tools last year and heightened demand for its AI chips among tech companies, NVDA has tried to expand its GPU facilities, which is evident from the launch of GH200 this year.

In addition, NVIDIA’s Chief Financial Officer, Colette Kress, underscored the company’s efforts to enhance the supply of its AI GPUs, indicating a commitment to meet growing market demands.

Buoyed by its heavy dominance in the GPU market, the company posted solid fourth-quarter results, which further fueled the stock’s trajectory. Its revenue increased 265.3% year-over-year, reaching $22.10 billion. Meanwhile, the company’s bottom line hit $12.29 billion, marking a staggering growth of 769% from the prior-year quarter.

However, NVDA didn’t experience such remarkable growth in its smaller businesses. Specifically, its automotive division saw a decline of 4%, totaling $281 million in sales. Conversely, its OEM and miscellaneous business, encompassing crypto chips, demonstrated a modest 7% increase, reaching $90 million.

Barclays research analyst Sandeep Gupta anticipates that demand for AI chips will stabilize once the initial training phase concludes. Gupta emphasizes that during the inference stage, computational requirements are lower compared to training, indicating that high-performance personal computers and smartphones could potentially meet the needs of local inference tasks.

As a result, this situation might diminish the necessity for NVDA to expand its GPU facilities further. With that being said, Wood’s observation about the potential for a correction in NVDA was validated when its shares plummeted last week after a robust year-to-date rally.

In addition, Wall Street analysts are ringing the caution bells as the stock reaches dizzying heights, suggesting that the AI market darling could face headwinds ahead, with expectations of slowing growth and fiercer competition.

Bottom Line

NVDA has solidified its position as a dominant player in the chip industry, primarily driven by the surge in demand for its AI chips. The company’s remarkable growth has been propelled by its cutting-edge technology and market leadership, positioning it as one of the most valuable companies globally.

However, the company’s heavy reliance on AI chip demand poses a potential risk, as any fluctuations or slowdowns in the AI market could significantly impact NVDA’s profitability and growth prospects.

Furthermore, NVDA’s shares are trading at a much higher valuation than industry norms. For instance, in terms of forward Price/Sales, NVDA is trading at 20.23x, 590.8% higher than the industry average of 2.93x. Likewise, NVDA’s forward Price/Book ratio of 25.89 is 493.7% higher than the 4.36x industry average.

The stock’s alarming valuation compared to its industry peers indicates investor confidence in NVDA's future growth potential, leading it to be willing to pay a premium price for its shares.

However, it also signals that NVDA’s anticipated growth might already be factored into its stock price, potentially dimming its attractiveness. With analysts projecting AI chip demand to stabilize, investors might be overly optimistic about NVDA’s future growth potential.

Moreover, Cathie Wood’s concerns regarding a potential correction in NVIDIA were recently validated by a significant drop in the company’s shares last week. The chipmaker closed more than 5% lower last week, marking its most challenging session since last May.

However, despite these uncertainties, NVDA’s growth potential may not have reached its peak yet, given the company’s ability to maintain its dominant position even in the face of stiff competition in the chip space. Therefore, adopting an entirely bearish outlook on the company’s shares might not be prudent.

Instead, investors could consider holding onto their positions, as there may still be opportunities for gains in the future.

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), Amazon.com, 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.

Nvidia vs. Netflix- Which Is the #1 Growth Stock to Buy in March?

With the S&P 500 soaring roughly 8% year-to-date, stocks have experienced a solid start in 2024, with investors reaping the rewards of putting their money in high-growth stocks. This positive momentum is expected to persist throughout the rest of the year and beyond.

Amid this market rally, chip giant NVIDIA Corporation (NVDA) and entertainment powerhouse Netflix, Inc. (NFLX) have emerged as beacons of growth, capturing investor’s bullish sentiment.

Although operating in distinct industries with unique business models, these titans share striking parallels in their journey to success. Their unwavering commitment to excellence, combined with strategic flexibility, has catapulted them to the forefront of their respective industries.

Therefore, let’s explore the fundamentals of NVDA and NFLX to unveil the ultimate growth contender of the month.

Last Reported Quarterly Results

In the fiscal fourth quarter that ended January 28, 2024, NVDA witnessed a staggering 265.3% year-over-year surge in its topline, totaling $22.10 billion. The company’s non-GAAP net income surged to $12.84 billion and $5.16 per share, marking a remarkable increase of 490.6% and 486.4% from the prior-year quarter, respectively.

As of January 28, 2024, NVDA’s cash, cash equivalents and marketable securities stood at $25.98 billion.

Conversely, for the fourth quarter that ended December 31, 2023, NFLX’s revenue rose 12.5% year-over-year to $8.83 billion. The company also experienced significant growth in net income and EPS compared to the previous year’s quarter, amounting to $937.84 million and $2.11, respectively. As of December 31, 2023, NFLX held $7.12 billion in cash and cash equivalents.

Growth Trajectory

NVDA, the reigning chip powerhouse, is currently one of the market's most sizzling stocks. Since its inception in 1993, NVDA has spearheaded cutting-edge computer chip technology, pushing the boundaries of graphics-heavy video games to unparalleled heights.

However, with the emergence of Artificial Intelligence (AI), these chips have swiftly ascended to newfound prominence, reflecting NVDA's enduring innovation and strategic adaptability. The company stands as a global giant in the production of Graphics Processing Units (GPUs) renowned for their ability to handle complex mathematical operations, powering captivating visuals across devices.

These advanced chips have become indispensable for training state-of-the-art AI programs such as ChatGPT and Gemini, underscoring NVDA’s pivotal role in driving the AI revolution forward. Leveraging AI to its advantage, NVDA’s earnings reports have managed to exceed expectations throughout 2023.

Furthermore, NVDA’s shares soared roughly 200% over the past year, buoyed by the company’s stellar earnings performance and solid demand for its AI chips. This surge attracted both institutional and retail investors, driving up share prices. With a market cap of around $2 trillion, NVDA has now claimed the title of the world's third most valuable company.

On the other hand, commanding a market cap of over $268 billion, NFLX stands as a pioneer in the streaming entertainment space, revolutionizing how audiences consume content worldwide. With a vast library of original programming and a global subscriber base, NFLX enjoys unrivaled dominance in the industry.

In a recent conference, NFLX’s CFO Spencer Neumann elaborated on NFLX’s trajectory under its revamped Co-CEO structure and its ambitious vision for future expansion. Neumann emphasized the smooth transition to the new leadership structure and NFLX’s dedication to broadening its entertainment repertoire, spanning films, TV series, gaming endeavors, and live content experiences.

Over the last few years, the tech company has adopted several strategic approaches to bolster its financial health. NFLX’s growth strategy hinges significantly on its substantial investment in content, with an annual expenditure projected at approximately $17 billion.

In addition, Netflix is venturing into new revenue avenues, including the introduction of an ad-supported subscription tier and measures aimed at bolstering monetization, such as combating password sharing.

Moreover, despite its risky move of cracking down on password sharing, NFLX’s latest earnings report revealed a surge of 13 million new subscribers in the final quarter of 2023, marking its most substantial growth since 2020. While initially met with resistance, the strategic move has been designed to counteract declining subscribership.

Greg Peters, NFLX’s Managing Director, emphasized during the earnings call that the company's top priority regarding ads is scalability. He highlighted a 70% quarter-on-quarter growth in the last quarter, following a similar growth trend in the previous quarter, indicating a positive growth trajectory for the company.

Competitive Landscape

In the dynamic worlds of technology and entertainment, both NVDA and NFLX are fiercely vying for supremacy in their domains.

The soaring popularity of generative AI owes a significant debt to NVDA and its groundbreaking GPUs. With skyrocketing demand and tight supply, NVDA's GPU H100 has emerged as a highly sought-after and premium-priced commodity, propelling NVDA to trillion-dollar status for the very first time.

With tech giants such as Microsoft Corporation (MSFT), Meta Platforms Inc. (META), OpenAI, Amazon.com Inc. (AMZN), and Alphabet Inc. (GOOGL) heavily relying on NVDA’s GPU chips to power their generative AI planforms, these companies have started developing their own AI processors.

In addition, NVDA faces stiff competition from other chip makers like Advanced Micro Devices, Inc. (AMD) and Intel Corporation (INTC), all striving to release the newest, most efficient, and potent AI chips to dominate the market.

Meanwhile, NFLX confronts fierce competition from fellow FAAMG (Meta (formerly Facebook), Apple Inc. (AAPL), Amazon, Microsoft, and Alphabet’s Google) heavyweights. The streaming arena is now brimming with contenders like Apple TV+, Amazon Prime Video, and YouTube Premium, launched by Apple, Amazon, and Google, respectively.

This fierce rivalry compels NFLX to perpetually innovate and enrich its content library to retain its crown as the streaming kingpin. Furthermore, the mounting expenses of content licensing and the delicate balance between original productions and licensed content present enduring hurdles for NFLX to overcome.

Bottom Line

As evidenced by their latest quarterly results, both NVDA and NFLX continue to deliver impressive performances, standing as formidable players in their respective industries, with their growth trajectories reflecting their strategic prowess and market dominance.

NVDA's cutting-edge GPU chips have propelled it to the forefront of the AI revolution, with staggering earnings growth and market capitalization making it a top contender in the tech landscape.

Fueled by these promising prospects, NVDA’s shares soared to unprecedented heights last month, with its market cap skyrocketing by a Jaw-dropping $267 billion in a single day. This remarkable surge nearly matched the entire market cap of NFLX, reflecting immense investor confidence in NVDA’s prospects.

NFLX, on the other hand, dominates the streaming entertainment space with its vast content library and global subscriber base. Despite facing stiff competition from tech giants and emerging streaming platforms, NFLX remains focused on expansion and innovation, which is evident in its ambitious growth strategies and robust financial health in the last reported quarter.

While challenges and competition persist, NVDA and NFLX demonstrate resilience, adaptability, and a relentless drive for success, making them compelling options for investors seeking growth opportunities in the dynamic worlds of technology and entertainment.

However, NVDA’s shares are trading at a much higher valuation than NFLX. For instance, in terms of forward Price/Sales, NVDA is trading at 19.37x, 178.7% higher than NFLX’s 6.95x. Likewise, NVDA’s forward Price/Book ratio of 24.32 is 116.2% higher than NFLX’s 11.25x.

The higher valuation of NVDA compared to NFLX indicates investor confidence in NVDA's future growth potential, leading investors to be willing to pay a premium price for its shares. However, it also signals that NVDA's anticipated growth might already be factored into its stock price, potentially dimming its attractiveness compared to NFLX.

Furthermore, while NVDA’s ascent captivates the stock market and propels the S&P 500 Index to unprecedented highs, Barclays research analyst Sandeep Gupta anticipates that demand for AI chips will stabilize once the initial training phase concludes.

Gupta underscores that during the inference stage, the computational demand is lower compared to training, suggesting that high-powered PCs and smartphones could suffice for local inference tasks. Consequently, this scenario may reduce the urgency for NVDA’s expanding GPU facilities.

As a result, investors might be banking on future growth that could potentially fail to materialize. With that being said, NFLX may emerge as a more promising growth stock compared to NVDA.

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), Amazon.com, 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.

Amazon.com, 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 amazon.com, 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 Amazon.com, 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.