The ‘Magnificent Seven’ stocks of Apple Inc., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc. are driving overall stock-market returns year to date in 2024. Yet, within this group, leadership has become increasingly concentrated. Shares of Amazon, Meta, Microsoft, and Nvidia have done most of the heavy lifting. These four stocks have contributed nearly 75% of the S&P 500’s total return this year, more than double the contributions from the top four stocks during this time last year.
Concentration risk is elevated due to this narrow leadership and it’s a problem not to be ignored. This is stemming AI-powered gains and has raised warning bells for some investors, as the market’s concentration has surpassed levels seen in the dot-com bubble. The 'Magnificent Seven' now make up more than 29% of the S&P 500, surpassing the 21% share the top seven stocks held in the 1999 and 2000 period. Considering Tesla which is no longer one of the top 10 largest stocks in the S&P 500, the concentration of the top 7 today is above 30%. This is a dramatic increase from the 14% concentration seen a decade ago. Here is a look at the top two laggards in the group and the potential opportunities they present to investors.
Apple
Apple has the world's most valuable technology platform with over 1.2B users. While Apple is exposed to a weaker consumer and competitive risks in China, these factors are well understood, and with the potential for Apple's long-term outlook remaining attractive given its technology leadership, sticky user base, and long runway to spend per user upside.
TECHNICAL INSIGHTS
Apple has to penetrate and hold the resistance pivot point around the $176.40 for an upward reversal to potentially retest this year’s high around $196. The alternative scenario is price breaks below the $164.940 pivot with a potential continuation to the Support at $156.50.
Moreover, Apple is trading below both its 50-day EMA at 174.654 and 20-day EMA currently at 170.530 with the 50-day EMA holding as a resistance to price penetration. The RSI is at 35.78% trending towards oversold levels with the MACD below its signal line, and negative. There is a probability the stock could continue is near term uptrend.
Aggregate Analyst Consensus: Apple has a cumulative consensus BUY recommendation with a Price Target of $199.97 based on 41 Analyst Ratings.
BULL BASE BEAR SCENARIOS
Bull Case $270 – Implies 34x Bull FY25 EPS of $7.99
(current 12-month options market price view: prob > PT appx 2.33%)
iPhone replacement cycles accelerate in FY25 as AI iPhone drives mid-to-high teens revenue/EPS growth. Consumer demand returns, and stronger than expected iPhone 16 upgrade intentions + mix shift to higher end iPhones drives 20%+ Y/Y iPhone revenue growth. Total revenue reaches $551B in FY25, while EPS reaches $7.99. We shift to a lifetime value-based valuation, which gives Apple credit for the shift towards subscription. Our bull case valuation implies a 34x P/E multiple on FY25 estimates.
Base Case $220 – 7.5x EV/Sales FY25 or 30x FY25 P/E
(current 12-month options market price view: prob > PT appx 18.46%)
Revenue is flat Y/Y in FY24, but Services and margins remain resilient, and investors look past near-term to Edge AI opportunity in 2025. Flat revenue is due to Servicesgrowth offset by Product declines. 45%+ GM through FY24 surprise to the upside, driven by mix and FX/inflationary headwinds fading. Investors turn their attention to FY25 & the impact from a potential AI iPhone launch, which alongside services growth, and $80B of annual buybacks, can reaccelerate fundamentals.
Bear Case $155 – 5.8x EV/FY25e Sales; 23.7x FY25 Bear EPS of $6.54
(current 12-month options market price view: prob > PT appx 25.99%)
iPhone 15 cycle continues to disappoint as consumer spending weakens more than expected while competition stays intense. Growth slows even further across the portfolio as discretionary income is pressured by hard landing, causing a weaker than expected year of Product spending to lead to HSD Y/Y revenue declines in FY24. Services also decelerates to MSD. With revenue flat, slight gross margin expansion drives LSD EPS growth, or ~$6.54 in FY25. Our bear case valuation implies a 24x FY25 P/E.
CATALYST TO UPSIDE
Positive estimates revisions from Product and/or Services strength, gross margins outperform expectations, iPhone 15 cycle surprises positively from demand deferral and share gains. As well as shift to a hardware subscription model, AR/VR headset and other launches scale more quickly, emerging market penetration surprises positively and an underappreciated 'Edge AI'.
CATALYST TO DOWNSIDE
Weaker global consumer spending, greater competition in key markets, increased regulation particularly around App Store and focus on nearshoring production weighs on margins.
Tesla
Tesla’s weak last quarter update is a clear sign of the ongoing EV ‘shake-out’ phase. Tesla has significant attributes to be valued as an AI beneficiary, but the company must see a stabilisation in the negative earnings revisions within the auto business first.
Despite overwhelmingly bearish sentiment from institutional investors, Tesla's appeal lies in being both an automotive stock and a leader in energy and AI/robotics. Negative developments in the global EV market very much matter to Tesla and should reasonably have a negative near-term impact on the price of the stock. At the same time, however, investors should not ignore the continued developments of Tesla’s other plays, many of which are auto related (i.e. the recurring revenue opportunity from the Tesla fleet and Robotaxi service), Dojo and other areas which we expect to learn much more about during the upcoming 2024 Tesla AI Day.
TECHNICAL INSIGHTS
Tesla has to hold the resistance pivot point around the $146 price level for a potential upward reversal to retest the short-term resistance around the $205 price level. The alternative scenario is price breaks below the support pivot with a potential continuation of its bear run to retest the previous low around $102 price level.
Tesla is trading below both its 50-day EMA at 178.449 and 20-day EMA currently at 207.986 with the 50-day EMA holding as a resistance to price penetration. The RSI is at 26.48% signalling an oversold level consensus and the MACD below its signal line, and negative. There is a higher technical probability for Tesla to continue its downward trend.
Aggregated Analyst Consensus: Tesla has a cumulative consensus HOLD recommendation with a Price Target of $185.15 based on 49 Analyst Ratings.
BULL BASE BEAR SCENARIOS
Bull Case $500 – ~24.3x 2030e EV/EBITDA
(current 12-month options market price view: prob > Price Target appx 0.00%)
For the core auto business, the assumption is based on if TSLA can deliver 9mm units by 2030 with ~20% EBITDA margin, which implies a value of ~$103 per share. With Tesla Mobility (Rideshare) at $118 per share. For Energy, $60 per share (35% 20yr rev CAGR). $61 per share allocated for TSLA as an EV powertrain & battery supplier (assumes 3mm units at 25% EBITDA margin and 25x exit EV/EBITDA at 2030). Insurance is valued at $11 per share. TSLA Network Services valued at $147 per share, on 25mm connected MAUs at $200 Monthly ARPU.
Base Case $310 – ~15.0x 2030e EV/EBITDA
(current 12-month options market price view: prob >Price Target appx 0.09%)
A consensus price target of $310 is comprised of these components: A $62 per share for core Tesla Auto business on 6.4mm units in 2030, 9.0% WACC, 13x 2030 exit EBITDA multiple, exit EBITDA margin of 17.0%. Tesla Mobility at $61 on DCF with ~158k cars at $1.8 per mile by 2030. Tesla as a 3rd party supplier at $39 per share. Energy at $38per share, Insurance at $5 per share, and Network Services at $104, 6.1mm MAUs, $180 ARPU by 2030, 50% discount.
Bear Case $100 – ~4.6x 2030e EV/EBITDA
(current 12-month options market price view: prob >Price Target appx 19.59%)
A $100 bear case ascribes $45 per share for automotive which assumes 5mn units by 2030 at a 12% EBITDA margin. Other value is ascribed to Tesla Mobility at $6 per share on a 200k car fleet and 15% OP margin by 2030, Tesla Network Services at $34 per share (15mm MAUs at $80 ARPU by 2030) and Tesla Energy at $15 per share. Tesla as a 3rd party supplier valued at $0 per share, $0 per share value for insurance.
CATALYST TO UPSIDE
Disclosure on service revenue, increased FSD attach rate, cost milestones on new battery, new model intro (Multivan, Semi), 3rd party battery win and geographic penetration & new capacity.
CATALYST TO DOWNSIDE
Competition: legacy OEMs/Chinese players/big tech. Execution risk: multiple factory ramps. Market does not recognize Dojo-enabled services opportunity, lower than expected attach rate & RPU and China risk.
Written by Joseph Baffour-Diawuoh Sales Trader, CMC Markets APAC Joseph Baffour-Diawuoh is a Sales Trader at CMC Markets with 15 years of industry experience. His journey began at Newmont, the world's largest gold mining company, where he honed his analysis and project management skills before moving into wealth and asset management. Joseph has a diverse background in fintech, consulting and advisory with experience across Australia, Europe, North America, and Africa. Prior to joining CMC Markets, Joseph worked as an Equities Advisor managing portfolios for HNW, sophisticated and family office clients here in Australia. At CMC Markets, his focus on trade execution, research, and education guarantees top-tier service and support for premium clients. |