Hargreaves Lansdown’s head of money and markets, Susannah Streeter, has issued a fascinating outlook for the world’s leading technology companies, the ‘Magnificent Seven’.
The US tech shares, including Nvidia, Alphabet, Meta, and Microsoft, have been instrumental in equity market returns in 2024 as developments in the field of AI boost sentiment and earnings.
Here is Hargreaves Lansdown’s ‘Magnificent Seven’ outlook, in Susannah Streeter’s own words:
The Magnificent Seven are set to continue to exert huge influence over Wall Street performance, given the weight of the tech giants on indices. They’ve been pushed even higher this year on a wave of enthusiasm for the potential AI presents and also expectations of lighter-touch regulation with President Trump returning to the White House in January. Nvidia is up 174% since the start of 2024 on a wave of AI euphoria pushing its market cap above $3.5 trillion dollars. Meta has risen by around 80% with its market cap now above $1.5 trillion and Tesla’s share price has risen by more than 86% year to date, helped by Trump winning the presidential election, pushing its market cap way over the £1 trillion mark.
Alphabet
Regulation is still hovering like a cloud over the company with the US Department of Justice having indicated that it may ask a judge to break up Google to stop its search monopoly. However, even if Google’s power is diminished and it’s not able to be the default search engine on devices owned by big tech giants, it’s sheer might of reputation in the world of search is likely to propel users towards it, nonetheless. The power of Google over the latest quarter indicates that its already harnessing AI technology to deliver improvements and get more fingers searching and more eyes on screen. Advertisers are also seeing benefits in terms of higher engagement.
It’s early days but given Alphabet’s super-deep pockets to pour into these new technologies, and its increasing dominance in the Cloud business, Google looks set to stay well positioned to take advantages of future developments.
At the moment it looks like its present cloud offering is much better suited to this new AI phase of growth than it was in the previous wave where Amazon’s AWS and Microsoft’s Azure fared better. Google is not a one tricky pony when it comes to AI. It’s tentacle approach, wrapping the technology into many crevices of the business makes it an attractive proposition. Nevertheless, as the AI juggernaut continues to rumble, it’s far from clear who will be the winners, and it could well be an upstart rival rather than a regulator which poses the greatest risk to Google’s search dominance.
Meta
Meta has been on an Ozempic-like trajectory. It’s slimmed down drastically but there have been questions over whether it may end up losing muscle in the process. So far Meta has maintained its lean machine physique and it’s taking on the heavy lifting of big investment into AI.
Meta’s huge scale means that volumes keep driving upwards and with daily users growing 5% in the third quarter and more eyes on screen are set to continue to be attractive for advertisers, with its core AI spend helping engage users and improve ad performance. The extent to which Meta will keep pouring cash into AI developments will be under scrutiny, but if the giant keeps delivering results, it’s likely to be seen as crucial investment rather than overspend. However, investment in generative AI and the metaverse is arguably more speculative given the technology is more nascent and therefore risky. Meta is in a good position to drive AI-related growth but if revenue does not keep pace with investment margins may come under pressure and investors may turn nervier.
Microsoft
Microsoft has planted itself in the centre of the AI revolution and shoots of growth from artificial intelligence are sprouting fast in all divisions. Given the direction of travel, revenues from its cloud computing arm Azure, which helps other companies build out the capacity to use AI tools, are coming in thick and fast at an impressive 34% click in the last quarter. Growth is set to ease off a little, but it will still be on an enviable trajectory.
Microsoft’s products and services infiltrate all areas of work and play and the way it’s own software stack will integrate its new AI capabilities is an added benefit, though there will be a watch on just how eager companies will be to snap up new subscriptions offering access to Microsoft’s CoPilot across its apps. There are risks ahead, notably in the cloud space given the might of the competition and regulatory hurdles are likely to pop up given the rapid development of AI technologies.
Amazon
Amazon’s cloud business AWS continues to be Amazon’s most lucrative growth driver, with revenues rising 19%. Companies rely on AWS for core IT infrastructure, and with the new wave of AI demand, computing power is set to continue to be a hot commodity. Given the AI megatrend unfolding it bodes well for AWS, but at the same time Amazon is also having to invest heavily in the technology to stay ahead and the sums it’s been pouring in has caused some nervousness and revenues will have to keep accelerating to justify the spending.
Investors are also seeing the recovery story for its e-commerce business continue to unfold with another positive chapter. Margins have recovered following the huge cost-saving drive which saw layoffs worldwide. Continuing to build revenues will be crucial and there could be headwinds here given that USD consumers are showing some signs of being more cautious in their spending habits. While Amazon offers efficiency and same day service, it’s not the cheapest marketplace in town, but its Prime subscription membership is a big boost to recurrent revenue.
Apple
Apple’s biggest asset remains its brand, and its power has shown up yet again in the latest iPhone sales figures which were stronger than forecast. With the first wave of Apple Intelligence features being rolled out, this bodes well for customer upgrades ahead. Innovations on phones have been fewer and far between so there is a lot riding on the appeal of these new integrated tools. Apple’s privacy credentials look set to stay a focus, with teams working on deploying smaller on-device language models on phones.
Growth in Services didn’t quite meet expectations in the last quarter but going forward this area of the business is set to be a key profit driver. There is higher margin potential and significant appeal for consumers with the bundling of popular apps like Music and TV, however growth will be reliant on phone sales. China is set to remain a tough market with competition intensifying from names like Huawei and despite Apple’s big fanbase it won’t be immune to economic hiccups elsewhere in the world.
Tesla
Tesla’s stock has soared since Donald Trump won the Presidential election, amid hopes Elon Musk’s right-hand man position will prompt policies favouring the EV maker. It’s likely that he will have sharp appetite in his new position for making ‘efficiencies’ which benefit his business interests. One area of focus for Musk is likely to be ensuring there’s an acceleration of regulatory approval for Tesla’s self-drive technology. Elon Musk is well-known for having a finger in many pies, which has caused nervousness in the past. Now he’s also at Trump’s top table concern may creep back in about the potential for his eye to be taken off the ball.
Currently at Tesla, underlying performance looks better than it’s been for some time, despite huge incentives put in place to push sales in a tough market, especially in China. Tesla still has pulling power when it comes to EV purchase decisions, and with more affordable models on track for production in the first half of 2025, it should open up the wider market. A dip in demand for EVs has been tricky to navigate and cost-cutting efforts are a core part of the near-term margin recovery strategy. Tesla has balance sheet strength to head on its next chapter of growth but given its hot valuation, and the longer-term nature of its innovative technologies’ patience will need to be the name of the game.
Nvidia
Nvidia, the chip giant has seen stratospheric growth, clinching the spot as the most valuable company in the world in June, and its dominance in the world of accelerated computing and AI is set to continue next year. It’s forecast to deliver treble digit sales growth, with revenue expected to come in at a staggering $129 billion next year, as demand for its AI focused computing platforms barrels on.
These expectations cement NVIDIA as a once in a generation company. A better-than-expected launch for the new Blackwell super chip is setting the tone for further near-term momentum. Data centre upgrades, and new cloud deployments all offer huge potential, and the company is also eyeing up big opportunities for dedicated AI infrastructure. However, for that to fully materialise AI needs to deliver strong financial returns for organisations that integrate it into their products and processes.
At the moment demand appears to be insatiable and supply constraints are starting to emerge. Key manufacturing partners are planning to add capacity but blockages in the supply chain remain a risk to be wary of. Such a mouthwatering addressable market is also bound to attract competition but NVIDIA’s technological supremacy and growing financial strength will mean it’ll be very difficult to knock off its crown. Based on the market opportunity and its impressive track record, the valuation doesn’t look too demanding. But given the exaggerated impact the company’s performance has on investor returns worldwide, there will be added pressure to keep delivering.”