The Magnificent Seven stocks are a group of seven high-profile stocks in the technology sector that have delivered outstanding returns in the last few years.

Bank of America analyst Michael Hartnett coined the phrase, borrowing the name from a 1960 Western movie depicting a group of seven gunslingers hired to defend a Mexican village from a band of outlaws.

The Magnificent Seven stocks include some of the most valuable companies in the world that benefit from secular technology growth trends like cloud computing, artificial intelligence (AI), spatial computing or electric vehicles (EVs).

What Are The Magnificent Seven Stocks?

Some analysts use the MAMA ANT acronym when listing The Magnificent Seven stocks.

Microsoft Corp (MSFT)

Microsoft is the largest global software company best known for its Windows operating system, Office software suite, LinkedIn, Xbox gaming platform and Azure cloud services. Over the last decade, Microsoft scored returns in excess of 1,000% as it remained at the forefront of innovation – the best example being a $13 billion investment in OpenAI.

Amazon (AMZN)

Amazon started as a humble online bookstore in 1994 but grew to become the largest global online retailer and a true "everything store." Through strategic acquisitions of brands like Whole Foods, Twitch, Zoox or One Medical, the company expanded into everything from brick-and-mortar retailing to video entertainment and autonomous vehicle development.

Meta Platforms (META)

Meta is a social media conglomerate that owns and operates some of the largest social media and messaging platforms like Facebook, WhatsApp, and Instagram. Although advertising makes up the bulk of its business model, the company shifted its strategic focus to building the Metaverse – one of the possible next iterations of the internet, where humans engage in immersive, 3D experiences.

Apple (AAPL)

Apple is a leading computer and consumer electronics company. Known for its stylish design, the company was a successful computer manufacturer before striking gold with a portable media player, the iPod, in 2001 and causing a paradigm shift in the mobile phone market with the iPhone in 2007.

Despite the outstanding success, Apple stuck with its core business, as evident from some of its largest acquisitions, like Beats Electronics, Dialog Semiconductor, and Anobit Technologies. However, its electric car project could become the next big milestone and propel the company forward into a new era.

Alphabet (GOOGL)

Alphabet is a technology company operating as a house of brands. It rose to prominence as Google, quickly becoming an undisputed leader in online search before integrating various other brands under its umbrella. These include a leading video streaming platform YouTube, telecommunications companies like Motorola Mobility and HTC, GPS navigation firm Waze, home automation firm Nest and others.

Over the years, Alphabet has happily pursued various tech ventures, and its current hot projects are the Bard AI chatbot and Gemini AI model.

Nvidia Corp. (NVDA)

Nvidia Corporation is a semiconductor company and a leading global manufacturer of high-end graphics processing units (GPUs). Nvidia's GPUs are irreplaceable for graphics-intensive applications like video games, 3D rendering, as well as AI and machine learning applications.

The company rose to prominence in the 2010s as cryptocurrency miners started using GPU hardware for their operations, causing demand to skyrocket. However, GPU applications in training AI models propelled the company to new heights as the market caught up with the importance of such technology.

Nvidia is by far the best performer out of the Magnificent Seven, returning more than 6 times the total return of any other stocks in this group.

Tesla Inc (TSLA)

Tesla designs and produces EVs, advanced driver assistance technology, and renewable energy products. Despite delivering a little over 1.8 million vehicles in 2023, the company is the largest automotive manufacturer by market cap. It successfully positioned itself as an EV market leader before the global trends pushed EVs into the spotlight.

Tesla owes much of its success to its controversial albeit charismatic leader, Elon Musk, who amassed an army of devoted supporters over the years.

Why Are The Magnificent Seven Stocks So Dominant?

The Magnificent Seven stocks are dominant because they're capitalizing on the concept of thematic investing. This investment doctrine follows investing alongside major trends, with current examples like cloud computing, AI, spatial computing and EVs. According to the venture capital firm Accel, AI added a stunning $2.4 trillion to the market caps of U.S. tech giants in 2023

While such trends often act like a rising tide – sometimes lifting entire sectors, the Magnificent Seven stocks represent the biggest and strongest prospects. These companies are able to leverage years, sometimes decades of know-how, paired with superb balance sheets and brand power to continue growing at outsized rates.

Microsoft's partnership with OpenAI is a vivid example. Many companies could afford a $13 billion investment in OpenAI; however, Microsoft's decades of experience within the sector, as well as superb cloud-computing integration possibilities made it the best strategic partner.

Pros and Cons of The Magnificent 7 Stocks

The Magnificent Seven stocks offer significant advantages but they are not without risks. Consider the following pros and cons when evaluating these stocks.

Strong Underlying Trends

The Magnificent Seven stocks benefit from some of the strongest technological trends in history. Trends like generative AI or cloud and spatial computing have civilization-transformative powers, attracting strong support from key market operators like institutional investors and policymakers.

Best In Class

The Magnificent Seven are clear-cut leaders within their segments, often fiercely competing among themselves. Still, these companies have not grown overnight. They have survived over many years, or even decades, enduring recessions, lawsuits, and leadership crises and still coming out on top. These companies have a track record of success, often in multiple fields, and are adept at attracting and keeping the best talent.

Fortified Balance Sheets

Since they generate extraordinary cash flows around the clock, these companies have fortified their balance sheets – often having cash and short-term investments far in excess of their long-term debt. This development allows them not only to endure a potential downturn but also to make strategic acquisitions – with Microsoft's $69 billion all-cash acquisition of Activision Blizzard as the prominent example.

Extraordinary Valuations

The Magnificent Seven stocks are very expensive when compared to the rest of the market. While their valuation oscillates, they are regularly trading close to 50 times their earnings, which is over 3 times the long-term average of the S&P 500.

Despite analysts arguing this valuation is not as expensive when considering outsized growth, according to Warren Buffett, investing in quality companies is just half of the equation. The other half is investing at favorable valuations.

Lack of Yield

The Magnificent Seven are not yield-oriented companies. Just three of them pay dividends, and these dividends are not notable.

Despite their strong cash flows, Apple, Microsoft and Nvidia each pay a yield of less than 1% – preferring to instead invest in growth, but making them less attractive to certain investors.

Are the Magnificent Seven Stocks Misrepresenting State Of Market 

The S&P 500 Index is the most popular stock return benchmark. However, it is weighted according to market capitalization. Thus, large companies like the Magnificent Seven stocks have a greater impact. In fact, just these 7 companies represent 28% of the index, while other 493 companies collectively contribute to the remaining 72%.

The 2023 results best show this outsized influence, as the regular S&P 500 rallied 24%, while an equal-weight S&P 500 returned 12%. This difference was the largest on record in this century.

Investment analysts measure these developments with market breadth – a fundamental concept that assesses the extent of participation in market movements. They typically use metrics such as the percentage of stocks trading above a moving average (average price for a defined period of time), comparison of stocks hitting new 52-week highs or lows or advancing/declining volume.

While a strong rally in Magnificent Seven stocks can move the market, it can also misrepresent its health. Betting on the market momentum caused by a handful of stocks can be risky, as a single negative catalyst can stop the rally dead in its tracks.

How To Invest In The Magnificent Seven Stocks?

Despite outsized returns in 2023, many market participants believe the positive trend will continue – particularly driven by the favorable outlook of technologies such as AI.

Despite its heavy participation in the S&P 500, investable through the SPDR S&P 500 ETF Trust SPY, the Magnificent Seven stocks are even more represented in the tech-heavy Nasdaq 100, tracked by the Invesco QQQ Trust QQQ.

Yet those who are looking to invest exclusively in these 7 popular companies might opt for a dedicated ETF – the Roundhill Magnificent Seven ETF MAGS. This equal weight actively-managed ETF, launched in April 2023, offers exposure at an expense ratio of 0.29%.

Despite being among the world's largest companies with proven business models, strong cash flows and fortified balance sheets, these companies are not without risks.

For investors, they carry a risk due to their high valuation as they trade at a premium price compared to the rest of the market.

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