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About $2.3 trillion was wiped from the value of the Magnificent 7 this month as the tech giants’ massive infrastructure spending has come under increasing scrutiny from investors looking for bigger returns in other parts of the market.
Components of Mag 7 microsoft, Nvidia, alphabet, apple, meta, tesla and Amazon. of CNBC Magnificent 7 Index It has fallen 10% so far in June.
These companies, especially Amazon, Microsoft, Alphabet, and Meta, are spending hundreds of billions of dollars buying chips and building data centers to power their artificial intelligence services. Part of this investment is supported by debt.
Investors are looking to the second quarter earnings season, which begins next month, to see returns on these investments.
“Tech investors are taking another ‘gut check’ for the tech industry in the coming weeks as they await the all-important second-quarter earnings season in July for further validation of the unfolding AI revolution,” Dan Ives, managing director at Wedbush Securities, said in a note on Sunday.
“In the meantime, uncertainty will continue as concerns over the cost of this once-in-a-generation technology boost enter the next growth gear.”
Some Mag 7 names have fared worse than others. Microsoft fell 20% in June, and Nvidia fell about 13%. Apple and Amazon both fell about 8%. Part of the sell-off could also be due to the lack of momentum around Mag 7.
“The market is trying to understand kind of the new story around Mag 7, because the company has gone from being an asset-light company that generates a lot of free cash flow to now being a more balance-sheet focused company,” Tom Lee, head of research at Fundstrat Global Advisors, told CNBC’s “Morning Call” last week.
“I think investors will start to see that balance sheet as a workforce. The reason they’re spending so much money is to essentially replace human effort with AI. That balance sheet is going to be deployed and it’s going to generate revenue. So over time, I think investors will start to see that as a moat…We’re in the transition period of that story.”
Chips remain strong
While some tech stocks have been hit hard, other parts of the market, such as semiconductor stocks, have held up.
of Philadelphia Semiconductor Indexincluding names such as: Taiwan Semiconductor Manufacturing Co., Ltd.Micron and ASMLup about 6% this month. This year, it’s up more than 90%, compared to Mag7’s 3.4% decline.
Chip names have benefited greatly from spending from big tech companies who have bought up semiconductors and are in short supply. This had a positive ripple effect throughout the supply chain, from component suppliers to manufacturers.
Memory is a major bottleneck, with component prices soaring due to lack of supply.
of Roundhill Memory ETFThe company, which tracks memory stocks such as SK Hynix and Samsung, is up 166% this year.
While concerns remain in some parts of the tech sector, micron Duncan Thoms, multi-asset strategist at HSBC, said in a note on Monday that last week he “drew cold water” on skepticism in the AI theory and “provided solid evidence that the AI background is alive and well.”
Analysts at UBS supported that view in a note on Tuesday, suggesting that while bottlenecks seen in the AI supply chain show no signs of abating, the investment bank expects cloud revenues to accelerate across major platforms through the remainder of this year.
“These support the strong fundamentals of the AI growth story, which we believe should remain a key driver for the overall market. For investors, we believe exposure to AI stocks will remain a key differentiator for stock market performance over the long term, but we also believe that diversification within and outside of AI is essential,” UBS said in a note.
