Mag 7 value shrinks by $2.3 trillion amid AI spending jitters
Jakub Porzycki | Nurfoto | Getty Images
Nearly $2.3 trillion has been wiped from Magnificent 7’s value this month as the tech giant’s massive infrastructure spending comes under increasing scrutiny from investors who see stronger returns in other parts of the market.
Mag 7 includes: Microsoft, Nvidia, Alphabet, Apple, Meta, Tesla’s And Amazon. CNBC Magnificent 7 Index It’s down 10% so far in June.
These companies, primarily Amazon, Microsoft, Alphabet, and Meta, are collectively spending hundreds of billions of dollars buying chips and building data centers to power AI services. Part of this investment is provided by debt.
While investors wait to see the return on these investments, all eyes are on the second quarter earnings season, which begins next month.
“As tech investors await a pivotal 2Q earnings season in July to further validate the AI Revolution evolution, we are undergoing another ‘gut check’ for tech trading a few weeks ago,” Dan Ives, managing director at Wedbush Securities, said in a note Sunday.
“Meanwhile, tensions will remain due to concerns about the costs of getting this once-in-a-generation technology advancement to its next phase of growth.”
Some Mag 7 names performed worse than others. Microsoft fell 20% in June, while Nvidia fell around 13%. Both Apple and Amazon are down about 8%. Some of the selling may also be due to the lack of momentum narrative around the Mag 7.
“The market is trying to understand the new narrative around Mag 7 because they’ve moved from asset-light companies that generate a lot of free cash flow to companies that are now more balance sheet-intensive,” Tom Lee, head of research at Fundstrat Global Advisors, told CNBC’s “Morning Call” last week.
“I think investors will start to see this balance sheet as a moat. The reason they’re spending so much money is essentially replacing human labor with artificial intelligence. This balance sheet will be distributed and generate returns. So over time I think investors will start to see this as a moat…we’re in a transition period of that narrative.”
Chips stay strong
While some technology stocks have been hit hard, other parts of the market, such as semiconductor stocks, are faring better.
Philadelphia Semiconductor IndexContains names like Taiwan Semiconductor Manufacturing Company., Micron and ASMLIt’s up about 6% this month. This year saw an increase of more than 90%, compared to a 3.4% decrease in Mag 7.
Chip names have benefited greatly from spending by Big Tech firms that have bought up semiconductors, leaving them in short supply. This has had positive ripple effects across the entire supply chain, from component suppliers to manufacturers.
Memory is a major bottleneck, with supply shortages causing component prices to skyrocket.
Roundhill Memory ETFIt’s up 166% this year, tracking memory stocks like SK Hynix and Samsung.
While tensions continue in some parts of the technology sector, revenues boom Micron “Cold water has been poured on last week’s skepticism in the AI narrative,” with “solid evidence showing a vibrant and healthy AI backdrop,” HSBC multi-asset strategist Duncan Toms wrote in a note on Monday.
UBS analysts backed that view in a note published Tuesday, arguing that bottlenecks in the AI supply chain show no signs of abating, while the investment bank said it expects cloud revenue to accelerate across major platforms for the rest of this year.
UBS said in a note: “These underscore the solid fundamentals of the AI growth story, which we believe should remain a significant driver of the broader market. For investors, we believe exposure to AI-related stocks will continue to be a key differentiator for equity market performance over the long term, but we also believe diversification is essential both within and beyond AI.” said UBS in its note.
