2023 marked the era of the “Magnificent Seven,” propelling the lion’s share of the S&P 500’s total return. However, in 2024, it appears we are down to the Fab Five.
Within this elite circle, while Nvidia, Microsoft, Alphabet, Amazon, and Meta Platforms continue to soar above the market benchmark, two stalwarts have stumbled along the way. Apple (NASDAQ: AAPL) stock, despite rising by approximately 15% this year, trails the S&P 500’s 16% year-to-date upsurge. Tesla (NASDAQ: TSLA) is grappling with a 1% year-to-date decline, despite a recent stock price surge.
Amidst this backdrop, investors face a pivotal question: will these prominent market players regain their former glory from 2023, or will they continue to lag behind the broader market?
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Charting Apple’s AI Ascent
Artificial intelligence emerged as the driving force behind most of the Magnificent Seven’s growth last year, with Apple a late entrant into the arena. The tech giant unveiled its new “Apple Intelligence” features at the annual Worldwide Developers Conference (WWDC) in mid-June. These enhancements span writing assistance, AI-driven image manipulation, a revamped Siri, and the integration of third-party large language models and apps like OpenAI’s ChatGPT into iOS.
From these AI unveilings, two potential catalysts surface. In the short term, Apple may witness a surge in device upgrades, given that Apple Intelligence will solely be accessible on select iPhone models. The software updates could nudge existing iPhone users towards quicker device upgrades.
Despite the stock’s post-announcement surge, the anticipation of a robust upgrade cycle might already be baked into its valuation. Nevertheless, a chance remains for Apple to surpass expectations upon the launch of new iPhones in September.
Long-term prospects suggest Apple has laid the groundwork for AI application deployment on iPhones, potentially fostering a wave of AI-based apps and traction for its Private Cloud Compute system. While this might not notably impact its 2024 performance, it could bolster its services revenue over time.
With Apple shares trading around 29.8 times forward earnings, the stock commands a premium valuation within the Magnificent Seven cohort. Given its substantial free cash flow generation, extensive cash reserves, and aggressive share buyback strategy, Apple is poised for robust EPS growth, especially if Apple Intelligence drives strong iPhone sales in the foreseeable future. Following a sluggish start to the year, Apple appears to be a compelling buy at present.
Decoding Tesla’s Diversification Hurdles
The first half of 2024 has dealt a series of setbacks to Tesla investors, chiefly stemming from intensifying competition and macroeconomic headwinds denting Tesla’s financial performance.
Pricing pressures loom large for Tesla this year. Faced with escalating interest rates and increasingly competitive market entrants, Tesla has resorted to price reductions to bolster sales volume. These actions have weighed on both sales figures and profitability, with Tesla reporting its weakest quarterly sales since 2022 in Q1, accompanied by a notable 55% profit contraction.
While Q2 witnessed an improvement, with Tesla delivering 444,000 vehicles and producing 411,000 units, indicating leaner inventory and enhanced free cash flow, the modest sales dip suggests another profitability decline on the horizon for the company.
Tesla’s strategy to recalibrate focuses on accelerating the introduction of budget-friendly vehicles to the market earlier than initially projected next year. This move aims to stimulate sales and fortify profit margins, albeit its immediate impact on the stock remains uncertain.
Anticipation mounts for Tesla’s August event, where details of its robotaxi initiatives will take center stage. CEO Elon Musk’s vision for fully autonomous vehicles and a robust robotaxi fleet underpins Tesla’s strategy. Nonetheless, sluggish progress relative to competitors raises skepticism. Tesla’s forward earnings multiple of 93 times starkly contrasts with traditional carmakers, underscoring the skepticism surrounding the stock’s valuation.
Investors pin their hopes on the forthcoming robotaxi event and Tesla’s future business potential, evidenced by the fervor surrounding the stock. A noteworthy presentation could propel Tesla’s stock upward, but a lackluster outlook might trigger heightened selling pressure. Given its current valuation, Tesla appears fraught with risk and is a difficult recommendation.
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Exploring Alternative Investment Pathways
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