Amazon, Tesla, Alphabet, Nvidia, Apple, Meta and Microsoft: the so-called Magnificent Seven are pushing the S&P to record highs. Why have they grown so much?
“Big tech has suffered enormously in 2022. To give extreme examples: Netflix lost 60 percent of its stock market value, Facebook even 75 percent. These companies have already recovered well in 2023 and that recovery continued at the beginning of this year. Despite everything, they generate phenomenal amounts of cash. They remain the companies of the future. Netflix has been able to tap into new subscribers because it has restricted password sharing. And Facebook has thoroughly scaled back investments in the not-so-performing Metaverse.”
Does it have nothing to do with the breakthrough of AI?
“That has provided another bonus, but even without AI the shares would be much higher. The lower interest rate has a lot to do with this. A company that will experience enormous growth due to artificial intelligence is Nvidia. It is the absolute top in the production of video cards and chips, which will only increase in importance in the future. The company has been able to double its profits in recent years: phenomenal. And yet the stock market value has only increased by 300 percent. I am convinced that Nvidia is still undervalued. Investors do not always notice this. Another reason is that more and more people invest in ETFs, which simply follow the stock market. The market for these trackers is already larger than that for traditional investment funds. That reinforces everything even more.”
The combined stock market value of The Magnificent Seven has increased to 11,000 billion euros, almost three times as much as the GDP of Germany. Aren’t they becoming too dominant?
“Of course, that means there is no room for competition. This only makes things worse for consumers: they pay too much for their products. Republicans and Democrats in the United States also think so. In the near future, there is a good chance that the Microsofts and Alphabets of this world will be broken up into smaller companies. That problem does not arise in Europe, because we do not have such large mastodons here.”
Pascal Paepen, professor of banking & stock exchange at KU Leuven. Image Sofie Silbermann
Will big tech companies continue to grow so rapidly in the coming decades?
“No, I don’t expect that. These will become old cash cows in the coming years. Usually the dominance of one particular sector or region lasts about ten years. Big tech has been around for some time now. In the future, raw material suppliers or environmentally conscious companies may take over. Or perhaps China will have the upper hand if they allow profits and ownership. Unfortunately, I can’t predict that.”
If the stock price suddenly rises so quickly, there is immediately the prospect of a bubble. Should we fear that in this case?
“No, again: these companies are making tons of money and they have almost no debt. So they won’t get into trouble. That was different for Amazon twenty years ago: it made no profit at the time. I therefore expect the fair to do very well this year.”
What should we do now: buy or sell more shares?
“You should always buy shares spread over time and space. Then you are always assured of a good return in the long term. Specific tips? I think Chinese stocks are extremely low at the moment. There is still some profit to be made. But shares in big tech also remain interesting. They may no longer grow at 50 or 100 percent, but they will become dull and gray companies with average annual returns of 8 to 10 percent. Still enormously better than the savings account.”
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2024-01-23 17:00:54
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