Magnificent Seven Stocks Slide, Valuations Looking ‘More Interesting’

The combination of high valuations and an overly concentrated market created an environment primed for a selloff, according to Eric Compton, director of equity research at Morningstar. “We thought Nvidia, Apple, Meta, and Tesla were 12%-30% overvalued just two weeks ago, while Alphabet, Microsoft, and Amazon were fairly valued. We didn’t see anything that looked cheap.”

As valuations have become more attractive, two of the Magnificent Seven—Microsoft and Amazon—have become undervalued according to Morningstar analysts. Amazon dropped into 4-star territory on Friday after selling off 8.8%.

“Valuations are starting to look more interesting, but overall, the technology sector still isn’t super cheap,” Compton says. “A lot of the names that have sold off have often started to come back to our fair values because they were already looking expensive.” He notes that the selloff has been “a bit more concentrated in semiconductor-related names, while software names have seen a bit more resilience. This is a reverse of what we’ve seen in the recent past, with semis skyrocketing and outperforming everything.”

Magnificent Seven Leading Stock Market Lower

From the start of 2023 until the most recent peak in the US Market Index on July 16, the market returned 50.2% cumulatively. Leading the rally was Nvidia, which surged 765.2% and contributed 7.5 percentage points to the gain on the market. Microsoft and Apple each gained over 80% and contributed over 4 percentage points to the market return. The next three largest were Amazon, Alphabet, and Meta, each contributing over 2 percentage points.

That trend has reversed. Since July 16, the index is down 8.6%, with the Magnificent Seven responsible for nearly half that loss. Nvidia was the largest detractor over the past three days, as the stock fell 14.2% and detracted 0.8 percentage points from the return on the Morningstar US Market Index. The second-largest detractor was Amazon, which fell 13.9% and detracted 0.5 percentage points after the company reported earnings on Aug. 1.

Overall, the Magnificent Seven accounted for 2.4 percentage points of the US Market Index’s 6.3% decline since the start of August. Other notable detractors include Intel INTC, which plummeted 34.6% following weak second-quarter earnings, JPMorgan Chase JPM, which fell 8.4%, and Broadcom AVGO, which dropped 11.6%.

Earnings Largely Positive

The selloff in the stock market has coincided with second-quarter earnings. During this time, the focus across much of the Magnificent Seven has again been artificial intelligence.

“Most of the Magnificent Seven are also tied to the AI train, one way or another,” Compton says. “While it hasn’t been all negative results on AI during the current earnings season, we’ve seen a continuing emphasis of ‘We’re going to keep spending’ from the companies, while investors are starting to question when the return on this investment will materialize, and how good those returns might be.”

Here’s how Compton summarizes Morningstar’s views on the Magnificent Seven’s earnings (minus Nvidia, which reports Aug. 28):

• Microsoft: Solid earnings. We raised our fair value estimate and liked the accelerated Azure-related revenues. The market reaction was muted.
• Alphabet: Solid ad revenue and Google Cloud growth.
• Amazon: Results roughly met expectations. AWS remains strong.
• Tesla: Earnings missed consensus. The market reaction was negative.
• Meta: Raised its capex guide to the high end of previous guidance. The firm emphasized that it will keep spending in 2025. Otherwise, revenue growth and ad spending remained healthy.
• Apple: We raised our fair value estimate. Apple is still dealing with slowing iPhone sales, and it is looking to 2025 for a new model launch and a pickup in sales.

Are Any of the Magnificent Seven Stocks a Buy?

Of the six stocks that have reported second-quarter earnings so far, five saw their fair value estimates raised, while Tesla saw no change. That left four fairly valued, while Apple is overvalued, and Microsoft and Amazon are undervalued.

With Microsoft’s stock near $400 per share, it’s in 4-star territory, trading at a 19% discount to its fair value estimate of $490. Amazon stock is also in 4-star territory, trading near $160 per share, a 17% discount to its fair value estimate of $195.

Compton also highlights Adobe ADBE, Palo Alto Networks PANW, NXP Semiconductors NXPI, and CrowdStrike CRWD as undervalued tech names for investors to consider.

Here’s more of what Morningstar analysts think of the Magnificent Seven.

Alphabet

• Morningstar Rating: 3 stars
• Fair Value Estimate: $182.00

Director of equity research Michael Hodel raised Alphabet’s fair value estimate to $182 from $179 following second-quarter earnings. “Solid ad revenue growth during the second quarter contradicts the notion that Alphabet is losing its footing in the search business,” he says. “Also, growth in the Google Cloud business accelerated again, reaching the fastest pace in 18 months as AI tools augment broader cloud adoption.”

Amazon.com

• Morningstar Rating: 4 stars
• Fair Value Estimate: $195.00

Amazon saw its fair value estimate raised to $195 per share from $193. “The company’s third-quarter outlook aligned with our revenue estimate and was better than our operating income estimate,” says senior equity research analyst Dan Romanoff. “Changes to our model are modest but center around continued profitability enhancements in the near term. Amazon continues to take strides in efficiency improvements throughout the network, which helps lower costs and improve delivery speeds, and ultimately drives increased purchases by prime members. After a pullback that began in early July, we see shares as increasingly attractive.”

Apple

• Morningstar Rating: 2 stars
• Fair Value Estimate: $185.00

Equity analyst William Kerwin bumped up Apple’s fair value estimate to $185 from $170, due to an increase in medium-term iPhone revenue. “We continue to expect strong revenue growth in fiscal 2025 as users upgrade their iPhones to take advantage of Apple’s generative artificial intelligence features, requiring the latest and greatest hardware,” he says. “We now forecast double-digit iPhone revenue growth in fiscal 2025 and another strong year of revenue growth in fiscal 2026. iPhone revenue remains the primary driver of Apple’s results. We see it as the linchpin to the firm’s walled garden ecosystem of hardware, software, and services, which underpins our wide moat rating and long-term growth thesis. However, we continue to see shares as overvalued. Apple’s current stock price implies closer to 20% iPhone revenue growth in fiscal 2025, which we see as lofty given headwinds to growth in China and slowing consumer phone upgrade cycles.”

Meta Platforms

• Morningstar Rating: 3 stars
• Fair Value Estimate: $450.00

Meta saw its fair value estimate raised to $450 from $400. “Meta continues to deliver solid results amid strong digital advertising demand while investing aggressively in AI-related infrastructure, technology, and products,” says Hodel. “The firm tightened its capital spending forecast to the upper end of its previous expectations and said that investment growth will be ‘significant’ in 2025. Meta reiterated that it believes the computing capacity it is building can be used for various tasks, with the flexibility to shift wherever the best opportunities emerge, a similar view that Alphabet has shared. We aren’t convinced Meta will earn strong returns on its infrastructure investment, but we expect the firm will continue to generate strong cash flow regardless of the direction AI takes. We were also pleased the firm maintained its expense forecast for the year.”

Microsoft

• Morningstar Rating: 4 stars
• Fair Value Estimate: $490.00

Romanoff bumped up Microsoft’s fair value estimate to $490 per share from $435 due to accelerating Azure growth. “In an earnings call packed with new data points around artificial intelligence-related demand, which were impressive, in our view, the single most important item was guidance that calls for Azure revenue to accelerate in the second half of the year as the current surging investment in data center capacity comes online,” says Romanoff. “Therefore, we raised our revenue growth estimates for the medium term, and we also tweaked our profitability assumptions higher based on consistently good performance and a solid outlook. Revenue was again governed by data center capacity constraints and several pockets of slight weakness arising in Europe. With shares down slightly after hours following a recent pullback, we see the stock as attractive.”

Nvidia

• Morningstar Rating: 3 stars
• Fair Value Estimate: $105.00

Nvidia reports second-quarter earnings on August 28. Following first-quarter earnings in May, equity strategist Brian Colello wrote: “Wide-moat Nvidia once again reported stellar quarterly results and provided investors with even rosier expectations for the upcoming quarter, as the company remains the clear winner in the race to build out generative artificial intelligence capabilities. We’re encouraged by management’s commentary that demand for its upcoming Blackwell products should exceed supply into calendar 2025, and we see no signs of AI demand slowing either.”

Tesla

• Morningstar Rating: 3 stars
• Fair Value Estimate: $200.00

Equity strategist Seth Goldstein maintained Tesla’s $200 per share fair value estimate following second-quarter earnings that line with his expectations. “Tesla’s second-quarter results were largely in line with our view for the cadence of the year,” says Goldstein. “Tesla shares were down 8% in after-hours trading. We think the market is reacting to earnings coming in below FactSet consensus estimates, as well as management’s lack of details for two key growth projects: the affordable vehicle and the full self-driving.”