In case you have not observed, the bulls are very a lot in management on Wall Road. The mature stock-driven Dow Jones Industrial Common, benchmark S&P 500, and growth-propelled Nasdaq Composite, have all soared to a number of record-closing highs in 2024.
Though broader themes, such because the artificial intelligence (AI) revolution, stock-split euphoria, and better-than-expected company earnings, have fueled this rally, the inspiration of this two-year (and counting) bull market was laid by the “Magnificent Seven.”
The Magnificent Seven characterize a few of Wall Road’s largest and most-influential publicly traded corporations, together with:
These are companies that, for essentially the most half, possess impenetrable moats. As an example, Alphabet’s Google has accounted for at least a 90% monthly share of global search relationship again greater than 9 years. In the meantime, Apple’s iPhone is the chief in home smartphone market share, Amazon Web Services is the world’s top cloud infrastructure service platform, and Meta Platforms lures extra day by day lively customers to its websites than another social media firm.
Picture supply: Getty Pictures.
Regardless of these aggressive edges, Wall Road has combined views on the place among the Magnificent Seven members are headed subsequent. Primarily based on value goal from two Wall Road pundits, the next Magnificent Seven shares can plunge by as much as 98%!
Nvidia: Implied draw back of as much as 98%
The primary Magnificent Seven constituent that at the least one respected Wall Street pundit sees losing a majority of its value is AI kingpin Nvidia.
In an interview with Fox Information Digital in Could, economist and monetary writer Harry Dent pointed to Wall Road being within the “bubble of all bubbles,” which he anticipated would outcome out there bottoming out in 2025. “I believe we’ll see the S&P go down 86% from the highest, and the Nasdaq 92%. A hero inventory like Nvidia, nearly as good as it’s, and it’s a nice firm, [goes] down 98%. Boy that is over,” per Dent.
Whereas Dent’s forecast of a 98% decline utterly overlooks Nvidia’s money circulation and the profitable working segments it had in place lengthy earlier than AI grew to become a driving drive on Wall Road — e.g., graphics processing items (GPUs) for gaming and cryptocurrency mining, together with virtualization software program — I do imagine he acknowledges the potential bubble Nvidia’s inventory could also be in.
As an ideal instance, we have not witnessed a next-big-thing know-how, innovation, or development, keep away from a bubble-bursting occasion early in its enlargement in at the least 30 years. Together with the appearance of the web, buyers have consistently overestimated the uptake and mainstream adoption of purportedly game-changing improvements for many years. To this point, nothing suggests synthetic intelligence goes to be the exception to this unwritten rule.
Past historical past being an issue, Nvidia is about to face a significant uptick in competitors on all fronts. Whereas most buyers are centered on exterior competitors, resembling Superior Micro Units bringing AI-GPUs to market, the true menace could come from inside.
Magazine-7 members Microsoft, Meta Platforms, Amazon, and Alphabet, are Nvidia’s four-largest clients by internet gross sales. All 4 of those respective trade leaders are internally growing AI-GPUs to make use of of their information facilities. Even when Nvidia’s chips stay superior by way of computing, the fee and accessibility benefits from these internally developed chips ought to finally strip Nvidia of valuable data center real estate.
It could even be clever to not overlook the function U.S. regulators have performed in capping Nvidia’s potential. In 2022 and 2023, regulators restricted Nvidia’s ability to export its AI-GPUs to China, the world’s No. 2 financial system by gross home product. It is a large downside provided that China has constantly supplied Nvidia with billions of {dollars} in annual gross sales.
Whereas I do not foresee Nvidia approaching a determine that is wherever near Harry Dent’s forecast of a 98% peak-to-trough decline, I do imagine AI must mature as a know-how, which can result in important draw back in Nvidia’s inventory.
Picture supply: Tesla.
Tesla: Implied draw back of as much as 90%
The opposite Magnificent Seven part that may collapse, based mostly on the prognostication of a lone Wall Road analyst, is electric-vehicle (EV) producer Tesla (NASDAQ: TSLA).
Final week, Tesla’s inventory surged following the discharge of its third-quarter working outcomes. Particularly, optimists centered on an uptick in gross margin, decisive year-over-year progress within the firm’s vitality section, and a more-than-tripling in year-over-year free cash flow (FCF) to $2.74 billion. Despite this and former working experiences, GLJ Analysis founder and longtime Tesla bear Gordon Johnson has a really particular value goal of $24.86 per share, which might indicate 90% draw back.
In a variety of earlier interviews with CNBC, Johnson has centered on Tesla’s latest earnings decline, referred to as into query the security of its autos, and cautioned of rising competitors within the EV area, as causes to imagine Tesla’s inventory may head to the mid-$20s. Whereas I, as soon as once more, do not imagine this excessive draw back goal might be achieved, there are ample causes to imagine Tesla can lose half or extra of its worth within the quarters/years to come back.
Growing competitors in a extremely cyclical trade is an apparent concern. CEO Elon Musk has beforehand famous that his company’s pricing strategy is dictated by demand. But even with Tesla slashing the promoting value for Mannequin’s 3, S, X, and Y on greater than a half-dozen events for the reason that begin of 2023, the corporate’s stock degree continues to climb on a year-over-year foundation. This implies Tesla has a transparent demand downside.
One other problem with Tesla is the quality of its income. On a year-to-date foundation, 51.3% of its pre-tax earnings will be traced to automotive regulatory credit and curiosity earnings on its money. These are two unsustainable earnings classes that don’t have anything to do with the center of its enterprise.
So as to add gasoline to the hearth, Tesla’s $2.74 billion in FCF grew due to some completely authorized, albeit easy-to-spot, accounting techniques. A notable enhance in accounts payable and accrued liabilities explains a great portion of this latest FCF enhance. That is to say that Tesla’s EV operations aren’t driving what would look like improved working outcomes.
Though Elon Musk has performed an enormous function in Tesla’s ascension, he could also be simply as culpable in sending shares of his firm meaningfully decrease. The overwhelming majority of Musk’s promises have failed to come true. The issue is that many of those improvements/guarantees are constructed into Tesla’s valuation. If these failed visions (e.g., Musk has been promising Stage 5 full self-driving yearly for a decade) are backed out of the corporate’s valuation, a lot of its market cap would evaporate.
Tesla’s valuation is the cherry on the sundae for pessimists. Whereas some buyers want to consider Tesla as a “tech inventory,” its auto enterprise is overwhelmingly important to its success, gross sales, and earnings. Auto shares usually commerce at a single-digit price-to-earnings (P/E) ratio, and never north of 80 instances forward-year earnings, like Tesla.
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John Mackey, former CEO of Complete Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an govt at Alphabet, is a member of The Motley Idiot’s board of administrators. Randi Zuckerberg, a former director of market improvement and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of administrators. Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. The Motley Idiot has positions in and recommends Superior Micro Units, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
