Has the shine worn off the Magnificent Seven?

The US stock market’s flagship companies – the Magnificent Seven – have seen their share prices slump since the start of the year. For investors who believe in the long-term growth of artificial intelligence (AI) and the might of Silicon Valley, the ability to buy in to these companies at a discount may have appeal. But have they dropped far enough to be interesting again?

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

There are two questions here. The first is whether to buy the Magnificent Seven, and the second is whether there are bargains in the wider technology sector. It is worth noting that the sell-off in the rest of the technology sector hasn’t been nearly as bad as it has for the largest stocks. While Apple and Nvidia are each down around 30% for the year to date, the equally-weighted Nasdaq index (which gives equal weight to smaller technology companies) is only down 5% for the year to date*.

Most agree that there are good businesses within the Magnificent Seven. Alec Cutler, manager on the Orbis Global Balanced fund, says: “Unlike the tech bubble, the leading stocks today are real companies, and really good ones.” Nvidia, for example, is still growing its revenues at around 80% a year, Meta saw revenues rise 21% in 2024, while Alphabet’s rose 14%**. These companies are mature businesses that nevertheless maintain astonishing growth and cash generation.

Also, these companies have suffered setbacks before and come back stronger. Between November 2021 and December 2022, Amazon’s share price almost halved. Investors who bought in when the share price bottomed out at $84 would be sitting on a gain of 133%***. Historically, the right option has always been to buy during a sell off.

However, there are reasons to think their current weakness could persist. These companies have been afforded extraordinary valuations because the US was considered ‘exceptional’. As the new administration engages in some risky behaviour with the US economy, that halo effect may disappear.

Also, they haven’t fallen very far. The Mag7 Index is only back to where it was in May, before all the exuberance around Donald Trump’s election and the promised tax cuts and deregulation. Arguably, they were already expensive then, and they remain expensive now.

Alec adds: “We think we can find much better opportunities from today’s starting point, and we try very, very hard to find the best ideas we can. Some of those ideas are the (mega-cap) juggernauts. We have owned Alphabet for years. Some of our stockpickers find Microsoft and Amazon attractive, and Meta looks reasonable enough to warrant some work. On the other hand, Tesla’s share price is a hype-driven rollercoaster with little regard for its fundamentals.

“We scratch our heads at Apple’s ever-rising valuation for ever-slower growth. And Nvidia, which three different Orbis analysts have looked at over the past two years, seems to us an excellent business—but one with exceptionally high expectations reflected in its share price.”

Others are more enthusiastic. Guinness hold six out of the seven in its Global Innovators fund^. Manager Matthew Page says: “Valuations, then, do not look out of line with history and growth expectations are similar to what we have seen over the past 10 years. Could claims of over-valuation be made on quality grounds? That is, have the underlying businesses deteriorated, making them worse value than before? We don't think so. We believe that these firms are arguably far higher quality than at any point in the previous 10 years. Operating margins have been trending upwards and are now, on average, significantly ahead of long-run averages.

A different question is whether investors should be looking elsewhere in the technology sector. The Magnificent Seven has drawn oxygen away from the rest of the technology sector as well as from broader global markets, which has left interesting technology companies on unambitious valuations.

These can be found further down the market capitalisation spectrum. IFSL Marlborough Global Innovation, for example, has around 55% in technology and holds companies such as gambling software group Playtech, water technology group Xylem and Latin American ecommerce platform Mercadolibre^^

Or they can be found in other markets. TSMC is every bit as exposed to the growth in AI, but it trades on a p/e ratio of 27x, compared to Nvidia at 52x^^^. This is a 9.5% holding in the M&G Asian fund, which also holds Chinese technology behemoth Tencent^^.

The rout in technology stocks has created some selective opportunities for investors. It has blown the froth off valuations for the Magnificent Seven, but companies such as Apple and Tesla still face difficulties ahead. It may be worth looking beyond these behemoths to the technology companies that have been overlooked, either because they are too small, or not US-listed.

*Source: GoogleFinance, NASDAQ-100 Equal Weighted, at 9 April 2025
**Source: company reports, full year end 2024
***Source: GoogleFinance, AMZN, at 9 April 2025
^Source: Guinness Global Investors, 31 March 2025
^^Source: fund factsheet, March 2025
^^^Source: macrotrends, PE ratio at 9 April 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.