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Should You Buy the Dip in "Mag 7" and Big Tech ETFs?
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On Jul 26, 2024, the big tech-heavy Nasdaq 100 ETF (QQQ - Free Report) recorded a 1% gain after two days of bloodbath on an apparent “AI fatigue.” The tech slump that happened last week was triggered by Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses. Tesla Inc.’s (TSLA - Free Report) stock also suffered following its earnings results due to a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts (read: Time for Covered Call ETFs?).
Most artificial intelligence (AI) technology leaders, including semiconductor giants like NVIDIA Corp. (NVDA - Free Report) , took a beating in the middle of last week. Many feared that the huge AI investments made by big tech companies would pay off later than expected.
The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. But does this fear make sense? Should you buy the dip in “Magnificent Seven” – Apple, Alphabet, Amazon, Meta, Microsoft, Tesla and NVIDIA and their ETFs? Was the latest selloff healthy?
Let’s find out.
Will Return on AI Investments Be Realized Later Than Expected?
A lack of visibility makes it difficult to determine a return on investment for big tech’s AI capex. Microsoft's capex on generative AI in data centers is expected to grow from $16 billion in fiscal 2024 to $23 billion in fiscal 2027, per Morgan Stanley analyst Keith Weiss, as quoted on investors.com.
Meanwhile, he predicts generative AI revenues of $5.3 billion in fiscal 2024 and $37.9 billion in fiscal 2027. Those estimates assume a "relatively modest" gross profit margin of about 50% in fiscal 2027. But then, with AI producing decent results in multiple business areas, the adoption of and the demand for AI tools is likely to go higher in the coming days globally.
In a 2024 McKinsey survey, 39% of respondents witnessed lower costs resulting from AI adoption in their organization, as quoted on Forbes. This means that over the long run, the AI business may prove to be at least a volume-driven revenue engine, if not realization driven.
Meanwhile, investments in AI are being made in full stride by big tech companies, sensing the potential. So, if you are not buying the momentum now and are waiting for the realization of a proper return-on-investment, you may be missing out on the current rally. And by the time, you want to jump into the AI initiative, the move might already be priced in.
What Does Valuation Say?
One should not forget that the AI king NVIDIA currently trades at a forward P/E of 42.1X versus 46.8X for the Semiconductor-General sub-industry. Alphabet trades at a forward P/E of 22X versus 23X for the Internet Services Market sub-industry.
Microsoft’s forward P/E stands at 32.3X versus Underlying Computer-Software Market’s P/E of 34.6X. Meta’s forward P/E stands at 23X, a 35% discount to its underlying sub industry software market’s P/E of 35.4X.
Amazon (AMZN - Free Report) , however, looks pricey given its forward P/E of 39.8X, trading at a premium to the sub-industry e-commerce market’s forward P/E of 27.5X. That said, we all know that Amazon today is more than an e-commerce company, it’s more in the information technology league. Apple (AAPL - Free Report) trades at a P/E of 33.1X versus the underlying computer mini-market’s P/E of 31.3X.
Need to be Choosy on AI Pick?
Primarily, all big techs are investing billions in AI, but not everyone is tasting the same success. Microsoft-backed OpenAI’s ChatGPT fired on all cylinders in its initial days of launch in late 2022. OpenAI has now posed its most direct challenge yet to Alphabet’s Google: a search engine that uses artificial intelligence baked in from the beginning.
OpenAI is testing SearchGPT, which will combine its AI technology with real-time information from the web to allow people to search for information. However, we are yet to be sure that OpenAI will be seen as great a success in Internet search as Google. While Alphabet initially stumbled on the Gen-AI initiative, Google has made the Gemini AI free version faster with a 1.5 flash update.
Are ETFs Better Bets?
The above-mentioned valuation and demand for AI show that the charm of big techs is still present. The likely Fed rate cuts in the near term should boost these growth companies even more. However, if you are unsure about picking the right AI stock, the ETF or basket approach is good for you. Roundhill Magnificent Seven ETF (MAGS) will give you direct exposure to the “Mag 7” stocks. The fund was off 5.5% last week, opening a good entry point now.
Other ETFs that can offer you a good amount of “Mag 7” exposure include Invesco S&P 500 Top 50 ETF (XLG - Free Report) , Vanguard Mega Cap Growth ETF (MGK - Free Report) and QQQ.
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Should You Buy the Dip in "Mag 7" and Big Tech ETFs?
On Jul 26, 2024, the big tech-heavy Nasdaq 100 ETF (QQQ - Free Report) recorded a 1% gain after two days of bloodbath on an apparent “AI fatigue.” The tech slump that happened last week was triggered by Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses. Tesla Inc.’s (TSLA - Free Report) stock also suffered following its earnings results due to a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts (read: Time for Covered Call ETFs?).
Most artificial intelligence (AI) technology leaders, including semiconductor giants like NVIDIA Corp. (NVDA - Free Report) , took a beating in the middle of last week. Many feared that the huge AI investments made by big tech companies would pay off later than expected.
The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. But does this fear make sense? Should you buy the dip in “Magnificent Seven” – Apple, Alphabet, Amazon, Meta, Microsoft, Tesla and NVIDIA and their ETFs? Was the latest selloff healthy?
Let’s find out.
Will Return on AI Investments Be Realized Later Than Expected?
A lack of visibility makes it difficult to determine a return on investment for big tech’s AI capex. Microsoft's capex on generative AI in data centers is expected to grow from $16 billion in fiscal 2024 to $23 billion in fiscal 2027, per Morgan Stanley analyst Keith Weiss, as quoted on investors.com.
Meanwhile, he predicts generative AI revenues of $5.3 billion in fiscal 2024 and $37.9 billion in fiscal 2027. Those estimates assume a "relatively modest" gross profit margin of about 50% in fiscal 2027. But then, with AI producing decent results in multiple business areas, the adoption of and the demand for AI tools is likely to go higher in the coming days globally.
In a 2024 McKinsey survey, 39% of respondents witnessed lower costs resulting from AI adoption in their organization, as quoted on Forbes. This means that over the long run, the AI business may prove to be at least a volume-driven revenue engine, if not realization driven.
Meanwhile, investments in AI are being made in full stride by big tech companies, sensing the potential. So, if you are not buying the momentum now and are waiting for the realization of a proper return-on-investment, you may be missing out on the current rally. And by the time, you want to jump into the AI initiative, the move might already be priced in.
What Does Valuation Say?
One should not forget that the AI king NVIDIA currently trades at a forward P/E of 42.1X versus 46.8X for the Semiconductor-General sub-industry. Alphabet trades at a forward P/E of 22X versus 23X for the Internet Services Market sub-industry.
Microsoft’s forward P/E stands at 32.3X versus Underlying Computer-Software Market’s P/E of 34.6X. Meta’s forward P/E stands at 23X, a 35% discount to its underlying sub industry software market’s P/E of 35.4X.
Amazon (AMZN - Free Report) , however, looks pricey given its forward P/E of 39.8X, trading at a premium to the sub-industry e-commerce market’s forward P/E of 27.5X. That said, we all know that Amazon today is more than an e-commerce company, it’s more in the information technology league. Apple (AAPL - Free Report) trades at a P/E of 33.1X versus the underlying computer mini-market’s P/E of 31.3X.
Need to be Choosy on AI Pick?
Primarily, all big techs are investing billions in AI, but not everyone is tasting the same success. Microsoft-backed OpenAI’s ChatGPT fired on all cylinders in its initial days of launch in late 2022. OpenAI has now posed its most direct challenge yet to Alphabet’s Google: a search engine that uses artificial intelligence baked in from the beginning.
OpenAI is testing SearchGPT, which will combine its AI technology with real-time information from the web to allow people to search for information. However, we are yet to be sure that OpenAI will be seen as great a success in Internet search as Google. While Alphabet initially stumbled on the Gen-AI initiative, Google has made the Gemini AI free version faster with a 1.5 flash update.
Are ETFs Better Bets?
The above-mentioned valuation and demand for AI show that the charm of big techs is still present. The likely Fed rate cuts in the near term should boost these growth companies even more. However, if you are unsure about picking the right AI stock, the ETF or basket approach is good for you. Roundhill Magnificent Seven ETF (MAGS) will give you direct exposure to the “Mag 7” stocks. The fund was off 5.5% last week, opening a good entry point now.
Other ETFs that can offer you a good amount of “Mag 7” exposure include Invesco S&P 500 Top 50 ETF (XLG - Free Report) , Vanguard Mega Cap Growth ETF (MGK - Free Report) and QQQ.