Magnificent 5 Or 7? Earnings Preview With Steven Cress
Contributor since 2023 / 1788 Followers
Summary:
- The Magnificent 7 stocks, including Tesla, are set to report earnings between April 23rd and May 22nd.
- Tesla’s stock has been down 40% and had a rough week, with analysts revising their estimates down.
- The overall performance of the Magnificent 7 in 2023 was impressive, with an average return of 111%.
- Meta’s strong story. Microsoft not as attractive. Strong buy on Google though some concerns. Amazon, Apple and Nvidia.
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Seeking Alpha’s Head of Quantitative Strategies, Steven Cress, walks us through Mag 7 stocks from a quant perspective (0:55). Analyzing Mag 7 earnings expectations (9:00). All eyes on Tesla’s recent decline (18:50). Meta looks to be much stronger story (27:55). Microsoft not as attractive; strong buy on Google with some concerns (33:05). Amazon, Apple and Nvidia (36:40). This is an excerpt from a recent webinar: Quant Research – Earnings Preview Of The Mag 7 (full video with slides).
Transcript
Daniel Snyder: Hello. Welcome, everyone. I’m Daniel Snyder from Seeking Alpha. I am joined today by Steven Cress, our Head of Quantitative Strategies at Seeking Alpha. Steve, how are you today?
Steven Cress: I’m doing really well. Thank you so much for having me today, Daniel.
DS: Thank you for taking the time. I mean, look. This is something that everybody needs to be prepared for. Right? We talked about the Mag 6. The Mag 6, it used to be the Mag 7. Some people call it the Mag 6 now. These stocks can move the market. They are the big heavyweights that everybody is keeping eyes on this earnings season.
But we can’t do this without including Tesla (NASDAQ:TSLA). So it will be the full Mag 7 list. And Tesla, all eyes are on them right now. So we’re excited to hear what you have to say today, Steve.
SC: It will be. I could not leave out Tesla.
So, I’ll take you sort of right into the Magnificent 7. I’m going to do a combination of a couple things here today. I’m going to take us through the Seeking Alpha Premium site. So we can go right to the stock pages and go to some other pages that we have in Seeking Alpha Premium that are really insightful per stock for Magnificent 7. So, hopefully, you’ll appreciate this.
Many of you own all the stocks if you have, especially, an ETF like (SPY) or an S&P 500. You do own these stocks in size. Some of you just have a couple of these stocks. So we’ll get through all of them, and then we’ll tell you a little bit about our Quant System and other stocks that we like as well.
So this presentation is going to offer an overview of the Magnificent 7. They start announcing on April 23rd, and they finish on May 22nd. Of these 6 names, they carry a fair amount of carry momentum, into this date to the end of the quarter with the exception of two that are actually in the negative domain.
And probably as many of you know, Tesla’s stock is down 40% and it’s had an awful week. How much was it down this week, Daniel? The last 5 days?
DS: The last 5 days? Let me pull it up here on Seeking Alpha real quick. I know we have that, last 5 days, Tesla stock is actually down 10.14%.
SC: Ouch. Glad we do not have a Strong Buy in that stock. I’ll also showcase the quantitative metrics that provide really an instant characterization. When you go to those stock pages, it tells you the quantitative recommendation, being if it’s a Buy or Strong Buy or a Hold and the factors that we look at.
And when you look at the factors and investment characteristics, we’re looking at value, we’re looking at growth, we’re looking at profitability. And the really cool thing about our Quant grades is it gives you that instant characterization of how these stocks stand on those metrics versus the rest of their sectors. So you know immediately if it’s overvalued or undervalued versus the sector or you know immediately if the growth is stronger, or if they’re more profitable than the rest of the sector.
So those are some of the important things to consider and I’m also going to demonstrate some of the other tools or resources that we have on our platform such as the portfolio tool and the screener to help you identify if you want to be in your stocks, or if you’re looking for new ideas.
So we’re sort of into the first quarter here, but I want to do a little quick review of the Mag 7 in 2023, a year in review. It was an unbelievable year for those stocks.
So the Magnificent 7 logged an impressive, a really, really impressive average return of 111% in 2023 compared to the broader S&P 500, which was up 24%. You’re not aware of this, some of you might be. The Magnificent 7, at the end of 2023, nearly — they accounted — those 7 stocks accounted for nearly one-third of the market cap of the S&P 500, and they accounted for about 44% of the market cap for the NASDAQ-100.
So tremendous amount of concentration risk in those indexes. But if you own indexes that reflect the S&P 500 or the NASDAQ-100, those ETFs really have a lot of concentration risk as well.
So why was the performance so strong in 2023? We think there are a couple factors. One, 2022 is actually a bad year for the stocks. Most years in the last decade, the Magnificent 7 as a group have outperformed, but actually in 2022 it was a big down year, and they actually underperformed the S&P 500. So, we think in 2023, it was a little bit of a reversion to mean that had a lot of ground to make up from their loss in 2022.
There’s also, as we were in 2023, there was a lot of uncertainty from investors in regards to where interest rates were headed, where inflation was headed, especially early on. You couldn’t even say at that time, was it going to be higher for longer.
It just seemed like inflation kept going up. So there’s a tremendous amount of uncertainty. In reaction to that, investors wanted to get defensive. So how do they get defensive? They buy large market cap stocks and they buy the ones that are extremely profitable. And that was the Magnificent 7.
And the third catalyst that was really maybe bigger than all the catalyst is, early in 2023, AI started to become an incredible buzzword. And people were really beginning to see the first companies like NVIDIA (NASDAQ:NVDA) and many others demonstrate the strength in their income statements and the strength that they brought in terms of growth of AI and how forward thinking the market was becoming with AI.
So, of course, the Magnificent 7 are the largest tech companies in the world. They all are active in AI, and investors were rewarded in stock. So there are couple reasons that led to that impressive 111% average return for 2023.
DS: Steve, quick, I want to jump in here.
SC: Yeah.
DS: I’ll mention that a lot of these Mag 7 names also have their hands in the ad market. And during that last year, we did see the ad market come roaring back as well…
SC: Absolutely.
DS: …fueling this growth as well. So Tesla, maybe not as much as the ad, but of – I mean, NVIDIA as well. But when you’re talking about Google, you’re talking about Apple (NASDAQ:AAPL), you’re talking – sorry Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), you’re talking about Apple, Amazon. (NASDAQ:AMZN), they’re all based on a whole ad revenue arm that brings in just so much money for these companies.
SC: Yeah. I would definitely say I need to add that as a bullet point. And those three, it’s really maybe four bullet points, not those three. There’s probably couple other ones out there that I’m leaving off to. But you’re absolutely right. Ad sales did rebound and a lot of it had to do with the efficiency of AI that got it there. So thank you for highlighting that.
So something I want to highlight though is that the performance of the S&P 500, in a manner of speaking, was actually really deceptive in 2023. Since the Magnificent 7 were such complete outliers, that 24% return we saw for the S&P 500, that 111% number really brought the S&P up.
So at the end of the year, the S&P was up 24%. But if you looked at the S&P on – in an equal weighted basis, it was actually only up 12%. And then if you looked at the median return for the S&P for 2023, it was actually negative 16%. So what it was like for the median return wasn’t anything close for what the S&P 500 had, let alone those Magnificent 7.
So some of what we’ve seen in this year — coming into this year is, I don’t want to say a little bit of a normalization, but there wasn’t quite the same focus. And up until the last couple of weeks, people were really beginning to think that, compared to year ago where it was like, how high are interest rates going to go, and that theme carrying of inflation, you know, continuing to move up.
In the first quarter of this year, people actually, were beginning to believe that the data points for inflation were showing that it was sort of flat to actually going down. And the market was speculating that as soon as June, we could actually start to see the Fed start to take rates down.
I’m not quite sure that’s the case based on the last couple of data points that we have had. Inflation, as always, it’s a very, very sticky problem. And the labor market continues to be very, very robust. So people in the last couple of weeks aren’t so sure that we’ll be seeing the rate cuts in June and inflation could actually stay higher for longer.
So some of the Magnificent 7 have continued to do well, but I think the market is not as nervous as it was last year. So we’re actually seeing the returns broaden out a little bit. S&P 500, I think, year-to-date is up about 5%. So has given a little bit back, but we are starting to see disconnect in the Magnificent 7. In fact, two of the stocks, Tesla being one and Apple, have not really done that well this year.
So this brings us closer to the companies announcing their earnings. As I mentioned earlier, it’s starting on April 23rd with Tesla and EPS estimate of $0.51. I’ve included, on this table the EPS revision grades.
So most analysts are actually still positive on the Magnificent 7. This isn’t like talking about the valuation frameworks. This is just really focusing on their earnings. And as I mentioned earlier, our Quant grades are sector relative. So when you look at these grades, you know how it compares to their sector that they’re in.
So, Tesla not looking great. Okay. That’s a D+, and we’ll dive into that page. You can see actually more analysts are bringing their estimates down for Tesla than they are up. However for most of the other stocks with the exception of Apple, analysts, by a majority are revising their estimates up, many more than are actually revising it down. And these are some pretty firm grades. Meta, we see is an A-. Microsoft is an A-. Alphabet is a B+. Amazon is an A. Apple’s a C+. So that’s kind of in line with the sector in terms of its EPS revisions, but NVIDIA, an A.
So looking at these companies on a valuation framework, according to FactSet, as of January 2nd, the Mag 7 forward P/E was about 35 times versus the S&P 500 at 15 times excluding the Mag 7. So when I look at the overall market, I actually think the market’s fairly attractive. If you’re looking at with those 7 stocks in it, yeah, it creates a huge outlier in terms of where the P/E is. But if you take the Mag 7 out, I think the market’s actually fairly attractive.
So as I also mentioned, in the beginning of the presentation about, the Magnificent 7 accounts for about one-third of the S&P 500 and more than 40% at this point in time for the NASDAQ-100. Interesting, the S&P 500 hit a record level since 1920 in terms of the level of its concentration with Microsoft (NASDAQ:MSFT), Apple, Alphabet, Amazon, and NVIDIA accounting for 25% its market cap, that is incredible — just 5 companies accounting for the market cap of 500 stocks in the S&P 500. So really interesting data point there in terms of that concentration risk.
However, some people might say this is where the growth is. So when we’re taking a look at consensus sales growth on a CAGR basis for the Mag 7 versus the rest of the S&P 500, it is growing faster than the S&P 500. We show that an 11% CAGR growth rate versus the S&P ex those 7 stocks it only has a 3% growth rate. So the Mag 7 drove the majority of the S&P’s returns in 2023. And it looks like with the estimates here going out to 2025, they’ll still be pretty important stocks in terms of growth.
However, in terms of valuation, very, very rich. So what we’re looking at here on the top left hand side, we’re looking at the Magnificent 7 versus the rest of the S&P, for the next 12 months for the P/E. So that’s sort of a forward P/E and you can see the Magnificent 7 has a forward P/E of 29 times. Early in the year, it was about 35 times, so it’s actually come down a little bit.
However, when you take a look at it versus the S&P 500, it’s at 19 times. So, again, the broader index, the valuation is a lot lower than the Mag 7. And if you take a look at the S&P 493, it’s at about 16 times. So if you’re looking at it in terms of a PEG basis, which is one of my favorite ratios, that’s where you combine the P/E with a growth rate, you’re looking at the Magnificent 7 about 1.7 times, and the S&P 500 at about, 0.87 times. So I think the PEG actually looks really good for the overall S&P 500 when you strip out the Mag 7.
So what is some of the performance that we’ve seen or coming up on earnings? So year-to-date, NVIDIA continues to rocket up 75%, Amazon up 21%, Microsoft up 10%, Alphabet up 10%, Meta up 41% year-to-date, the 2 laggards and this is where we see the disconnect from the Mag 7 going to maybe the Mag 5, Apple is actually down 12% year-to-date, a lot of analysts are starting to think that Apple could be dead money based on their growth rates going forward. And, Tesla really taking it on the nose.
So, the factor grades, and that’s what we’re going to take a closer look at for the Mag 7. As I mentioned from a Quant perspective, the core investment characteristics that we look at are value, growth, profitability, momentum, and analyst EPS revisions. And just remember, when we look at these factor grades, they’re always sector relative. So it’s giving you that instant characterization of where the stock stands versus the rest of the sector.
This is sort of a quick picture of the Mag 7 and those grades that we hold so highly as well as the Quant score. So from a Quant standpoint, in terms of directional recommendation, there’s only one stock of the Mag 7 that we actually have a strong buy on and that is Google. And a lot of that comes down because even with the devaluation, it’s more attractive from a valuation standpoint and a growth standpoint and profitability standpoint than the other stocks.
So you see the valuation grade on NVIDIA is an F; on Meta, it’s an F; Amazon is a D-; Microsoft is an F; Apple is an F; and Tesla is an F. So compared to this sector, these stocks are really, really overvalued.
DS: But just to highlight as well, all of them are an A+ on profitability.
SC: They are, they’ve got mega amounts of cash. Mega, mega amounts of cash.
DS: And the best management companies probably in the entire world.
SC: Yeah. And they hire — yeah. There’s no question about it. I’m glad that you bring that up because the Quant grades are really important to us. They’ve been time tested. But if you own these stocks and you’re passionate about it, you want to take a deeper dive into these metrics because they could actually demonstrate to you that it’s worth holding on to.
So we sort of went over this. This is the order of — this is — I actually keep a portfolio, we have a great portfolio tool at Seeking Alpha Premium, and you could load up your own stocks to the portfolio, or you could load up a wish list.
You can load up a number of different portfolios. I load up Warren Buffett’s portfolio for Berkshire Hathaway (BRK.A) (BRK.B). I load up ETFs. So I could look at a drone basket or cannabis basket or China ADRs. And one of the baskets that I keep here in the portfolio tool is just the Mega-Tech Stocks.
So we could see, what numbers that we’re looking for in terms of the EPS estimates, which are the consensus estimates from analysts. We could look at the revenue estimate, and then we could look and see what they had for last quarter and if they beat or they missed.
And Tesla looks like it was the only one that surprised to the downside, in terms of the bottom line and the top line. All the others actually look pretty good at the last quarter and the EPS revision grades tell us that analysts are continuing to look for these stocks to go up.
So this is the earnings page on it. We can go to the whole summary here, which will show you Wall Street analysts are always positive on these stocks and I think they’re always positive because they want to get investment banking and they want to bring management around.
The Seeking Alpha contributors, little less positive but they have a buy recommendation on the three of the seven stocks and the Quant really just favoring Google. But if we take a look at the performance page, and I love this, you can see how the stocks have done in the last week.
So, Tesla as you mentioned over the last week getting hammered, down about 12%. Microsoft down about 4% as well. But then we could take a look at the last month and sort by that and that strong buy that we have on Google looks like it’s worked out and it’s up about 10%, Meta is up 3.6% in the last month and then you can sort of just click over here and sort, and you see most of these stocks have beat year-to-date the S&P 500. Again, the S&P 500 being up about 5%. The only two that have underperformed have been Apple and Tesla.
So I really like the portfolio tool. You could even do the health score on it, on the Magnificent 7, and it’ll show you some interesting information from a Quant perspective. All 6 are rated Hold with just the one Strong Buy. What do the analysts think? They pretty much have it in Hold territory as well.
The ones that do pay dividends, they look awesome. So we have three of them paying dividends. The dividend safety scores are really, really high there.
And then if you just looked at those core investment characteristics, they’re really solid for growth, profitability, momentum, and revisions. The only area that these stocks are weak is on valuation. The valuation framework being expensive for a lot of them. So that is the tool that I look at for the Mag 7.
Let me take you to the very first stock that’s going to be reporting, which is Tesla.
DS: Which, this is a controversial one. Right? There’s people out there saying, we need to take Tesla out of the Mag 7. Let’s make it the Mag 6. It’s underperforming. It’s losing its market capitalization. So just to clarify, it might not be there much longer.
SC: It’s you know, they may start calling it the Mag 6. They may start calling it the Mag 5. Who knows? By the end of the year, it could be, you know, the Mag 3. We’re not sure.
But in terms of who’s reporting soon, if I click on earnings and I hit the upcoming announcement date, we could see Tesla is going to be the first one. So I’m going to follow an order of who’s reporting and go over the stocks.
So we have, Tesla, and I’m going to click on 5 days, down 10.2%. Year-to-date, down 39%. So from a Quant perspective, F on valuation framework, growth comes in at around C+. They are profitable, and that looks great. But the momentum on the stock versus the rest of the consumer discretionary sector, pretty poor, and the revisions are poor.
So let’s go to that revisions page because that’s — we’re coming up on earnings season. Everybody is looking at what the analysts are saying.
So in the last 90 days, we have a grade here. The revisions grade reflects the actual quantity of analysts that are bringing the estimate up or down. So, this isn’t the actual earnings estimate itself — it’s the quantity of analysts are moving up or down. It’s a bit of a proprietary metric that we have at Seeking Alpha.
I absolutely love it because you could have so many Wall Street analysts that will have a Strong Buy or Buy in the stock, but then when you see what they’re actually doing with their earnings estimates, it could be an entirely different story, and this revision grade will tell you that story.
And what is the story? In the last 90 days, only two analysts have taken their earnings estimate up for Tesla. And 31 have taken it down. And that’s for the fiscal year earnings, that we see here. So it gets that D+ grade. If you look on the upper right hand card, you could see what the announcement date is supposed to be, April 23rd. What the estimate is, $0.50 for EPS normalized, $0.44 for GAAP.
If we look just at the quarter, only one analyst has taken their estimate up, coming into the quarter here in the last 90 days. 12 have taken it down. So again, the difference here, this is for the quarterly estimate where we look at the grade that we have — or the Quant grade, that’s actually for the entire fiscal year. So it’s quarter versus year. Not a great looking picture to tell you the truth.
Here’s a number of analysts who have commented on it, but I’m going to shrink that down. And we could just see either Tesla was stellar for many, many quarters, but the last two quarters, it’s a miss. It’s, you know, it’s missed expectations on both the bottom line and the top line. So it is a bit unnerving when you consider that so many of the analysts are taking their estimates down as well too.
So, if you went back to the summary page and again you could just look at the factor grades. I’m going to really just quickly show you from a valuation standpoint at one click away, you could see all the underlying metrics that make up our valuation grade of F. So you can see, on a P/E basis, on EV to sales, on PEG, most of these grades are F or D-.
This is a very transparent system, Daniel. So if you look to the right of the grid, we actually give you the absolute data point. So if you’re looking at P/E, non-GAAP for Tesla, it’s at 49 times versus the sector a multiple of 13 times. So that means that the P/E is at a 262% premium to the sector.
That is really, really overvalued compared to the sector. But again, it’s just not for P/E. We have a number of different value metrics we look at that make up that value grade, and it’s just a sea of red. Whether it’s EV to EBITDA, price to book, price to cash flow, price to sales, and it’s just a sea of red for the stock.
If we look at growth. At one point, we were seeing a lot of green, but there’s been a pullback. The revenue growth is really strong versus the sector year-over-year and even the forward revenue growth rate. But if we look at the bottom line, we could see that the EPS forward growth rate is actually C-. It’s now coming in at negative 1.48% versus the sector at 2.69%. So the EPS growth for the company is actually lower than the sector. And that’s part of what’s dragging this down as well, sort of that free cash flow per share forward number as well. That’s a D+ range.
If we look at profitability, it looks pretty good. Gross profit margins are never great. But if we look at the bottom line margins, net income margins looks really good. Return on common equity is great, you know, ROE at 27% versus the sector at 11.2%. So profitability isn’t really the question, it’s really the growth that’s slowing down and the incredible overvaluation from it.
Something else I wanted to point out on this is, you could look at the Quant. We update that Quant every single day. We update the income statements, balance sheets, cash flow, all the financial metrics. Those scores we get, we refresh them. So you always know that directional recommendation is coming from these factor grades that have been updated every day.
As you scroll down in the right hand rail, you can actually see, within the consumer discretionary sector from a Quant ranking, Tesla comes in at 209% out of 522 stocks and within the automobile sector it ranks number 15 out of 31.
You could also take a look at what contributors are writing about. So outside of the factor grades, you could see what the contributors – we sort of have a crowdsourced system here at Seeking Alpha. So we go through research reports that are generated from people outside of Seeking Alpha. These are referred to as our contributors, and they hold different views. Some have a Sell, some have a Hold, some have a Strong Sell.
So you just take a look at this. I actually wrote a report and I think it was one of the most painful experiences I had. I read a lot of articles. And back in June of last year, I wrote an article, Toyota Trumps Tesla. And as you can see, there’s 777 comments. Daniel, I felt like our client base beat me to death on this. They did not like that.
DS: It was controversial at the time, right? So everybody was on this EV train, and this is when Tesla still had very healthy gross profit margins as well.
SC: They did. But what we saw from the Quant grades was, we saw like, the forward growth was slowing down, and we saw the valuation framework. And when we compare it to the other auto stocks, Toyota (TM) looked just so much better. It had a — the fundamentals were much, much better. The growth was much stronger. The valuation framework was much more attractive.
So I wrote this article basically saying with the data. It’s not like I have a subjective opinion here, or any type of favoritism. I’m simply reporting it how I see the data come forward. And the data is just looking at historical data or consensus analyst forward data.
And looking at the data, Toyota came across much stronger. We wrote the article back in June of 2023. And since that time, Toyota is up about 52% versus the S&P, which is only up 15%. And, obviously, Tesla, we know what’s happened since that period. So it’s really outperformed. But man, did I take a beating when I wrote that article?
DS: I want to point out real quick, though, on Tesla. I mean, this really is a margin story at this point with commodity prices going higher, and people are watching these margins as they’re slashing vehicle prices. So I think that’s what the street and all these analysts are really tuned into right now, and it’ll be interesting to see what they report.
SC: It is I think, yeah, people are highlighting that it is profitable, and you want to do that, especially in an environment where you might be fearful that inflation could be stickier, or rates could be higher for longer. But people have not rewarded Tesla.
I think they feel the valuation is just too expensive on this stock. So despite it having that probability, I think they’re fearful of that valuation. And they’re also fearful a little bit of the growth rate slowing down and the impact that could have on profitability going forward. So, obviously, you know, over the, since the beginning of this year, Tesla and Apple are not doing too well.
Our next company that reports is Meta (NASDAQ:META) on April 24th, one day after Tesla. So I think this looks like a much stronger story than Tesla does.
We did have a Strong Buy from a Quant perspective on Meta for quite a long time. If I show you the history here, going back over a year, we had a strong buy. And it’s odd because, like, actually in 2022, we sort of had a warning shot on Meta, because they were putting so much money literally into the metaverse, into those goggles. It was like an unprecedented rate that they were sinking into it and the numbers didn’t add up.
And analysts worldwide were saying this about Meta. And people within the company were saying it about Meta. And I feel like, we wrote this negative article in 2022. And sure enough, you know, I think the great thing about their management team is they got it and they started watching costs. They started putting more money into AI and the stock got rewarded, earnings got rewarded, investors came to the stock, our rating went from a Hold to a Strong Buy, back during this timeframe.
So it went from the Buy — the Strong Buy came out in April of 2023, and the stock went from $240 all the way up to $459. And we sort of just recently came off to a Hold. So it had a wonderful run up there.
So what are we looking for earnings coming up? The upcoming earnings, we’re looking for $4.34 on normalized, $4.31 in GAAP. So this is a big difference. Okay? Tesla, I pointed out, most analysts have revised their numbers down in the last 90 days. Look at this for Meta. Okay? In the last 90 days for the fiscal year estimate, 51 analysts, 51 have revised their estimate up. Only one has taken their estimate down for Meta. That is incredible.
And going into the quarter, for the quarterly number here for $4.34, we’ve had 30 analysts that have taken their estimates up for the quarter. Zero have taken it down. So the analyst committee is really, really strong on the stock going into the quarter. So the expectation should be that they beat expectations.
Again, the Quant rating, it’s got that valuation grade of F. So I’m going to click on that. And this is where, you know, if you own the stock, I really invite you to take a look at the Quant factor grades and you could judge for yourself. Okay. If you owned the stock, and something I would highlight here is, yes, on a P/E basis, it’s a D-.
The multiple is 33 times versus the communication service sector at 12 times. So it is incredibly rich on P/E, but if you go down to P/E GAAP, it looks a little bit more attractive. And then we go to one of my favorite ratios, the PEG ratio, it’s actually B-. So when you combine the P/E along with growth, it’s actually at a discount to the sector. So you could clearly make the argument, whether it’s a trailing 12 months or a forward PEG, you could make the argument that on a PEG basis this actually looks attractive.
Just when you take a look at all the other valuation metrics, it’s not that attractive. So that kind of wins out. That overall score wins out when we total up the valuation grade. Not looking great. But on a PEG basis, it does look good. How does the growth look? Looks freaking awesome. Okay? Well, year-over-year revenue was at 15.6%. The forward revenue was at 15.2%. So it’s really holding firm at a very, very high growth rate. The sector has a revenue growth rate of only 2.4% and 2.7% going forward.
If I looked at the EPS, the bottom line, it’s got a growth rate of 39% versus the sector at 6.4%. Hence that, A factor grade that you see there — remember that factor grade, that’s there to sort of give you that instant characterization, so exactly how it stands versus the rest of the sector.
You were talking about profitability before, Daniel, it does not come much better than this. I mean, holy smokes. Yeah. Gross profit margin, EBIT margin, EBITDA margin, return on equity, return on total capital, it is almost straight As for this. Really a beautiful picture.
And we take a look at it, ranked in the sector, it is ranked only 44 out of 240. Most of the companies are not going to have that type of profitability. Ranks number 11 within its industry. I will take you to those screens to show you what companies actually rank higher.
But in terms of an environment where people are beginning to be a little bit more fearful of interest rates again, and inflation being stickier than longer, you can see the stock is up 1.54%, and it’s had a pretty good return year-to-date being up 41%. People have a lot of confidence that this is sort of a safe haven.
The next stock that reports is Microsoft (MSFT). So, we’re not going to find as attractive numbers for this, but I’ll take us right to the valuation framework. You could see that the P/E, very expensive, and has those D+ grades at 35 times versus the IT sector at 21 times. On a GAAP basis, it’s looks a little bit more attractive. But the PEG, unlike what you saw with Meta, was in that B, B- territory. This is actually in a C- territory.
So the PEG is not quite as attractive. So it does give you some pause here. You don’t have that same type of growth. And I’m going to go to the growth page and you can see it’s not straight As, but it is good. You know you see Bs, you see one A, you see B, B pluses. The growth rate is not quite as high for Microsoft as it is for Meta. But still stronger than most of the industry.
And look, the EPS, forward growth rate is 11.45% versus the sector at 6.95%, you know, that’s a good growth rate compared to the sector. It ranks number 8 in the industry out of 46. So within the sector, it’s 94 out of 551. Again, profitability, you’re absolutely right. Looks awesome. So if you’re going to be defensive, you sort of want to be in those stocks that have strong profitability.
I’m going to take us to Alphabet (GOOG) (GOOGL). This is where we had a strong buy. So over the last year, the stock has pretty much been a strong buy. It’s up 47%, so it hasn’t disappointed at all. In terms of the valuation grade on this, not quite as bad, as we see with Tesla and not as harsh as we see with Meta. But even with Google, it doesn’t have the same PEG that you saw with Meta, which was really nice in sort of that B camp.
But the valuation is not as expensive as some of the other tech stocks. So it’s at about 22 times versus the sector at 12 times. Here, we’re looking at the communication services sector. So the valuation is not quite as insulting. And when you go down on a PEG, it’s actually like a C+.
So you can just look at these firsthand for yourself and get an idea of where the Quant system comes from. Profitability, of course very, very strong for Alphabet. So gross profit margins at 56% and return on common equity at 27%, EBITDA margins at 32%. Looks great there.
How does the earnings look? So, I think we saw 51 up with Meta, only one down. Not quite the same case with Google. Google, in the last 90 days, you’ve had 34 analysts have taken it up, which is nothing to sneeze at. But you’ve had 14 that have revised down. So there’s actually a little bit of uncertainty in the analyst community, coming for the year and then for the quarter as well. You’ve had 15 up and 11 down. So little bit of concern.
Again, this is a stock that we do have a Strong Buy, because when you take our scores for growth, profitability, momentum, revisions, along with valuation framework, it’s just a little bit more solid ground. And that valuation is not quite as expensive as some of the other stocks.
Taking us to Amazon. Amazon comes in with a D- grade for valuation. Again, much of the same. We’re seeing the conventional metrics incredibly expensive for Amazon.
The P/E trailing is 62 times versus the consumer discretionary sector at 13 times. And on a forward basis it’s 43 times versus the sector at 14 times. So it is really, really overvalued to the sector and when we looked at it on a PEG basis, it comes in as a C-. But in terms of growth, yeah, stellar. We’re seeing a lot of As there and a lot of Bs for top line, bottom line, something you want to look about.
And then profitability, absolutely fantastic. Whether you’re looking at return on equity, or EBITDA margins. Let’s go to the earnings. That’s what we’re coming into. I’d say analysts are pretty positive overall. Last 90 days, we’ve had 44 analysts have taken their estimates up and only 3 down. And coming into the quarter, 27 up and one down. So I think that looks pretty positive, but again overall Hold recommendation on it. That valuation is just a bit rich for the Quant system.
And then when we get to Apple, this does not look good.
We had Google, which was up over 40% for the last year with that Quant Strong Buy, Apple’s pretty consistently has been a Hold, and it’s only up 1% for the last 52 weeks, and indeed year-to-date it’s down 13%. So what are we looking at going into earnings? This is actually pretty bleak. Not as bleak as Tesla, but in the last 90 days only 18 analysts have revised up.
The majority of analysts, 21, have taken their earnings estimate down for Apple. For the quarter, that’s very bleak. We’re looking at an EPS estimate of a $1.51, and on a GAAP basis a $1.49, only one analyst has taken the rest of it up in the last 90 days, 23 down. So, not a very pretty picture there for Apple.
And you could take a look at what some of the contributors are saying. There are a couple of Buys, couple of Holds, but some Sells too. So definitely some stuff you want to consider with that.
So this brings us to the final company that’s going to be reporting, which is NVIDIA (NVDA). Now this has been a hold. There’s one stock out of the Mag 7 where I wish, you know, in hindsight, I could have put more weight on that PEG ratio. It would have been in the case of NVIDIA. Okay.
This stock has been stellar. It’s up 200% over the last 52 weeks. Year-to-date, the stock is up 70%. So it’s not only carrying the Mag 7, it is carrying the entire S&P 500. Okay. Up 70%. Seeking Alpha contributors, they have a Hold. They think the stock is actually a bit rich themselves. Wall Street always, the perennial, you know, infinite, just Strong Buys and Buys forever on the Magnificent 7 stocks.
That’s why I really looking at what our contributors have to say. The Quant system, it’s been a hold consistently and a stock like this, you know, it’s just going to have that valuation and then I can take us to that page. Obviously, the conventional metrics look very expensive, but that PEG ratio is an A-.
So again, this is where if you own the stock, I would encourage you to take a look at the valuation page, and you will uncover certain metrics. So you could say to yourself, well, you know what, from a PEG standpoint, this actually looks super attractive. It’s at a discount to the rest of the technology sector. And it ranks number 7 out of 65 stocks within its sector and it’s got a Hold, and it’s still coming in at number 7. So as an individual, you could definitely make an argument here that this stock still looks attractive.
Taking a look at earnings. Alright. It doesn’t get any better than this. Okay. In the last 90 days, 42 analysts, 42 have taken their estimates up, none have taken it down going into the quarter, for the fiscal year. And then going into the quarter, 35 have taken it up, zero have taken it down. So the analysts are really positive. This kind of tells me that they believe in this company, but they probably believe in AI as well. Continuing to be strong.
You know, for many, you are just at the very, very, very, very, very beginning of AI. It’s like the Internet at the very beginning. There’s a lot of analogies that you can make with artificial intelligence. I’d say really the difference between the Internet and mobile phones and telecom equipment companies, with AI we’re actually seeing profitability and we’re seeing productivity in many companies outside of the IT sector that are actually benefiting for AI. It really is a game changer in the years ahead. And NVIDIA is leading that game change.
So that sort of gives us a view on the Mag 7 and where we stand and I just want to sort of give a snapshot of where we are right now. So over the last 4 weeks going into earnings season, it actually has been a really interesting 4 week period.
A lot of the data that’s been coming out has given people to take pause. People were expecting interest rates to start coming down around June. But the inflation numbers and the labor numbers, not looking — I guess you could say the economy looks great. But inflation looks like it’s a little bit stickier.
So we’re seeing how some of these stocks are performing, going into earnings here. And you can see NVIDIA has continued to trade up, Meta has continued to trade up, Amazon has traded up, Microsoft is sort of borderline negative 2%, Google up 1.78%.
So people have been focusing on these stocks as the S&P is up only 5% year-to-date. You could see these stocks aren’t providing much better return, but people not having confidence as you can see in Apple and Tesla.
How does the Magnificent 7 look versus the major indices? Again, going back to December of 2022, if you took a look at the Magnificent 7, they’re up 98% versus the Dow Jones, which is only up 10% and versus the S&P up 34%, and the NASDAQ up 62%. From that period, the Mag 7 have outperformed, but now it looks like it’s more of the Mag 5 than the Mag 7.
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