The “Magnificent Seven” represent some of the strongest companies out there. However, several members of this elite group have failed to live up to expectations in the first half of 2024.
Since the beginning of the year, the much followed S&P 500 The index is up 14.8% through June 26, but weak iPhone sales have hurt Apple (NASDAQ: AAPL) shares, which rose by 11.6%. Tesla (NASDAQ: TSLA) is the worst performer, with a recent decline in sales of its electric cars sending the stock down 21%.
Sometimes betting on strong companies that are temporarily weak can pay off in the long run. Indeed, both companies have promising growth opportunities in artificial intelligence (AI), which could have a huge impact on shareholder returns over the next decade.
Here’s why these stocks are poised to take off.
1. Apple
Weak iPhone sales have weighed on Apple stock so far this year, but since the company’s last earnings report in early May, the stock has outperformed the S&P 500, up 21%. The stock saw a significant bounce after the company’s Worldwide Developers Conference in June, where Apple unveiled the highly anticipated artificial intelligence (AI)-powered features coming to iOS 18 later this year.
Apple Intelligence will be the biggest update to Apple’s operating system in years. The AI features in this update will allow users to summarize long text, create images, and get personalized search assistance from Siri, to name a few highlights.
Of course, Apple has a profitable business angle here. While iOS 18 is free to download like previous updates, its AI features require devices with more recent processors, such as the A17 Pro chip found on the iPhone. iOS 18 will be a huge incentive for users with older devices to upgrade, and that could lead to record iPhone revenue this holiday season.
In addition to iOS 18, the iPhone 16 is also expected to come in a new, larger 6.9-inch size for the Pro Max version, which on its own could be enough to generate strong demand. It all sets up for a period of improved revenue growth in the year ahead.
Wall Street analysts are increasingly optimistic. The current consensus is that Apple’s revenue will grow just 3% in fiscal 2025, but Evercore ISI recently increased its growth forecast from 4% to 7% and even sees a scenario where Apple could see double-digit revenue growth next year report.
As the launch of iOS 18 approaches, more analysts may raise their growth estimates, which could push the stock price even higher in the second half of 2024.
Of course, the push into AI software could also benefit Apple’s higher-margin services business (e.g. app sales) and drive above-average profit growth. For these reasons, Apple is likely entering a period of accelerating growth that could launch its shares higher in the coming years.
2. Tesla
Tesla shares have halved from their all-time high. There are a few reasons behind this, including weak auto demand amid rising interest rates and the uncertainty surrounding the recent shareholder vote to reinstate CEO Elon Musk’s 2018 performance award.
With shareholders recently voting to reinstate Musk’s $56 billion compensation package, a major cloud over the stock is being lifted as some investors worried that Musk could ultimately leave Tesla if the vote doesn’t pass. However, the stock has moved higher since the vote as investors turn their attention back to Tesla’s growth opportunities.
Tesla plans to unveil Cybercab in August, opening up a huge market for the company. Analysts expect the majority of Tesla’s long-term revenues to come from the robotaxi market, which is significant considering the company’s $626 billion market capitalization is largely based on electric car revenues that currently exceed 80 % of the company’s turnover. . However, RBC Capital expects that 52% of Tesla’s valuation will ultimately be driven by robotaxis, 27% by fully self-driving car software, 15% by Megapack batteries and only 6% by electric cars.
Musk compared Tesla’s robotaxi business strategy to that of services such as Airbnb And Uber. Tesla will operate a portion of the robotaxi fleet itself, while a certain number of customers can choose to contribute their own cars to the service. Tesla aims to one day have tens of millions of cars in its fleet worldwide. It would create a new revenue stream with a high-margin service fee flowing back to Tesla.
The robotaxi capability reflects Tesla’s growing AI capabilities, with about 35,000 Nvidia H100 graphics processing units (GPUs) currently used for AI training, but there are plans to have more than double that number by the end of 2024. These aren’t cheap, as each H100 sells for thousands of dollars. Tesla’s capital expenditures have quadrupled to $9 billion over the past four years and will continue to grow.
If Tesla manages to expand its robotaxi service over the next decade, it could have a huge impact on the company’s profitability and therefore lead to a higher valuation for Tesla stock. Given the company’s history of proving critics wrong, it’s worth keeping some shares of this Magnificent Seven stock in your holdings for a rainy day.
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John Ballard has positions in Nvidia and Tesla. The Motley Fool holds positions in and recommends Airbnb, Apple, Nvidia, Tesla and Uber Technologies. The Motley Fool has a disclosure policy.
Halfway through 2024: 2 Underperforming ‘Magnificent Seven’ Stocks to Buy Before They Take Off was originally published by The Motley Fool
