2023 was dominated by the "Magnificent Seven," which drove the bulk of the S&P 500's total return last year. This year, it's more like the Fab Five.
While Nvidia, Microsoft, Alphabet, Amazon, and Meta Platforms have all continued to outpace the market benchmark through the first half of the year, two members of the group have failed to keep pace. Apple (AAPL 0.13%) shares are up about 15% this year, trailing the S&P 500's 16% year-to-date return. Shares were down more than 10% at one point this year. Tesla (TSLA 5.60%) stock is still down about 1% for the year despite a recent surge in the share price.
Should investors expect these two market leaders to return to their 2023 form or continue trailing the market?
Image source: Getty Images.
Apple's finally joining the AI trend
While artificial intelligence drove the growth of most of the Magnificent Seven last year, Apple wasn't a big player in the space until recently. It announced its new "Apple Intelligence" features at its annual Worldwide Developers Conference (WWDC) in early June. The new features include writing assistance, AI image generation and editing, and a much more advanced Siri. Apple also announced a system for integrating third-party large language models and applications like OpenAI's ChatGPT into iOS.
There are two potential catalysts from these new AI announcements. In the near term, Apple could see an increase in device upgrades. Apple Intelligence will be available only on the iPhone 15 Pro and iPhone 15 Pro Max as well as the forthcoming iPhone 16 lineup. The new software features could push more older iPhone users to upgrade their existing devices on a faster cadence.
The expectations for a strong upgrade cycle may be built into the stock at this point, after it rallied higher following Apple's announcements. Still, there's an opportunity for it to exceed expectations when it launches new iPhones in September.
Over the long run, Apple's showed off the groundwork for running AI applications on iPhone. It could usher in a slew of AI-powered apps and demand for its Private Cloud Compute system for integrating complex queries to third-party services. That could be a boon to its services revenue, but it won't have much impact on the business this year.
Apple shares currently trade around 29.8 times forward earnings. While that's higher than the overall S&P 500 valuation, it's on the lower end of valuations among the Magnificent Seven. Apple arguably deserves a premium valuation as it produces tens of billions in free cash flow every quarter, sits on a significant sum of cash, and uses all of that cash to buy back a ton of its shares. That should help it produce strong EPS growth, especially if Apple Intelligence drives strong iPhone sales over the next year and beyond.
After a slow start to 2024, Apple looks like a buy now.
Tesla needs to prove it's more than a car company
Tesla investors have been dealt several blows over the first half of the year as competition and macroeconomic challenges have weighed on Tesla's results.
Pricing pressure has been the biggest challenge for Tesla this year. Amid high interest rates and lower-cost competitors, Tesla has pushed price cuts to sell more vehicles. That's weighed on both sales and profit. The company reported its lowest quarterly sales since 2022 in the first quarter, down 8.5% year over year. Its profit shrank 55%.
Tesla improved in the second quarter. Sales reached 444,000 vehicles in the quarter, which is down about 5% year over year, but better than analysts were expecting. What's more, it produced just 411,000 vehicles, which suggests lower inventory and better free cash flow. Still, the sales drop probably means the company will report another drop in profits when it releases its second-quarter earnings results.
Tesla is aiming to correct course by bringing new affordable vehicles to market sooner than planned next year. The move could spur sales and shore up profit margin. But it's unlikely to play a significant role on the stock this year.
The biggest event aside from its monthly delivery numbers and quarterly earnings reports is an event in August, detailing Tesla's robotaxi plans. CEO Elon Musk has long promised fully autonomous vehicles and a fleet of robotaxis using its technology. So far, progress has been slower than promised. Several other companies are years ahead in the robotaxi business.
Tesla shares currently trade around 93 times forward earnings. That's an earnings multiple that's not even comparable to other car companies. Even if you expect strong delivery growth over the next few years as new affordable cars roll out, that price is hard to justify. Investors are expecting big things from the robotaxi event and the potential for the business going forward. An impressive presentation could send shares higher, but a disappointing outlook could result in more investors selling. At its current valuation, Tesla is too risky to recommend.
