Time to put money into the 'Magnificent 7' tech stocks?

If you haven't already followed us on Spotify Apple podcasts or youtube music, please do because that way you get an alert the moment a new episode drops. All right. Ok. So let's get started with some financial news that caught our attention this week. And of course, I will need to bring in the assistance of my editor Tiffany Tiffany. Hi. So, what are we discussing first? Ok. So first our favorite antihero pop star is in town. I'm not a swift, are you? I'm not a swifty, but you know what?

I have to admire her business sense. Yeah, I must say so. Yeah. And already we're starting to see what's known as the Taylor Swift effect. Oh, yeah. So a bit of background in an interview, the Thai Prime Minister said that Singapore paid a handsome grant to Taylor Swift's team to woo her here for an exclusive Southeast Asia stop. So that got many people asking how much did we pay? And is it worth it? Yeah. You know, it may seem like a dig at Singapore,

but it is a valid question, right? So the Singapore Tourism Board didn't really disclose how much they gave in grants, right? And never did. No, they didn't. But tells and airlines told CN that demand for flights and accommodation around the concert dates have gone up by 30%. Wow. Ok. That makes sense because Singapore is one of only two stops in Asia for Taylor Swift. The previous one being Japan and we have six shows here in Singapore. Completely

sold out. Ok. So we're probably expecting lots of fans coming in from Malaysia, Indonesia, Philippines, Thailand and disappointed fans in Australia. Maybe we didn't get to catch her in the Australia tour. We might see them too. Yeah. Yeah. So back to the question, is it worth paying a grant to Taylor Swift's team? I mean, I suppose if you see that the concerts can be a big source of revenue for the country, then

yes. So earlier on you mentioned Japan, right? Researchers estimated that her tour in Tokyo generated up to $227 million for Japan and they have fewer shows than we do. Exactly. And they are also predicting that the concerts here in Singapore will exceed the estimated $787 million in economic value from Taylor Swift's time in Melbourne. That is insane. You know what I'm thinking? I think it's time to look at stocks in the hospitality and travel sector perhaps

because that's likely to go up. So if you happen to be able to have that flexibility to move around, this might be the time to do it. And don't forget we still have a lot of major concerts and events coming up in Singapore, not just Taylor Swift and speaking of up, you know what went up to Junior Bank staff bonuses. What, what am I doing in this job? That's what I ask myself every time I see headlines like this. But you know what? Congratulations to you. If you are working

in a bank, it's a great bonus for you. Yeah. So specifically CD BS and you will be all announced a one off bonus for the junior staff, Junior, Junior Junior. So this is to help them cope with rising living costs. O CBC and D BS are giving their junior employees $1000 each Singapore dollars while you will be junior staff are getting an extra month of bonus. No guess is where all

of that bonus is coming from. And I think banks had a fantastic year with all the interest rate income that they've been generating over the past couple of years. I think this is a good move. It's a bit of a thank you as well for people who stuck around and work behind the scenes and lots of work for banks that were kept busy for the last two years or so. Now, if you're listening to this and you would like a nice bonus too. Just like me, you can tag your boss just like I will not.

I hope you get that bonus. Anyway. Good luck. Did you know that the number seven is considered a lucky number in Japan, perhaps that's why the biggest and currently best performing tech names in the stock market are dubbed the Magnificent Seven. But they won't always called that. You see tech stocks had their beginnings actually as Fang stocks, Facebook, Amazon, Netflix, Google Fang. Fang evolved into fam, not as cool because Apple and

Microsoft joined the league. Netflix dropped out and then Tesla and NVIDIA joined to form what's now called the Magnificent Seven or if you're cool like me the Mac seven. And for that, we can thank Bank of America Analyst Michael Hartnett who coined the phrase in 2023. He was describing the seven tech companies dominating the stock markets, but you know what anything shiny is vulnerable to losing its luster and the

Mac seven, they aren't immune to this. So while tech stocks are having a moment, we should also take our moment to consider the risks and rewards of investing in Mac Seven stocks. What your game plan should be if you're already there to help us with. That is Jonathan Wu, senior equity research analyst with Philip Capital. Hey, Jonathan, thanks for coming. Thanks for having me. So in just a span of about three years, so much has happened to big tech, most of them

making up the Mac seven. What are the factors that are driving these Mac Seven stocks to their current strength? So first of all the revenue growth, right? I mean, obviously you've got a lot of demand from consumers for a lot of these big tech companies, you just think about a couple of them off the top of your head. You know, me and Google, everybody uses Google nowadays every day for countless hours, everybody's watching youtube people on Facebook.

If they're not on Facebook, on Instagram, Netflix, everybody uses Netflix. Now they've kind of been taken out of the Mac seven, but you get the point, right? So a lot of consumer demand that's really driving a lot of the growth for a lot of these tech companies. So they've had quite the journey from the.com renaissance that we saw in the early two thousands, right? And then they had the COVID-19 pandemic surge, right? So they were pandemic darlings because everyone was stuck at home.

They had to use Netflix, they had to use their phones, they had to use their Facebook to stay connected with their friends and family. But then we saw a painful tumble after those COVID-19 restrictions were eased. Now, there's a sustained out performance in the market. I'm most curious about this current stage we're seeing right now, the early months of 2024. How was it that they were able to make that stunning recovery from down in the dumps post pandemic, which was only what, 1.5,

2 years ago to where they are now. So I think it's a couple of things. Firstly, when the dip happened, you kind of saw growth slowing down a little bit and then they were still kind of expanding. So they're still spending a lot of money on head count on, on a lot of projects that were long shots, but at the time because growth was going so well, they had enough cash to do it, right. So that kind

of sent them tumbling down a little bit. And as they focus towards efficiency throughout the most of 2023 and even now they cut a lot of their fat off the bone. They are much leaner. They've got a lot of operating leverage and demand has actually returned or remain consistent at least. Yeah. And so that's what fueled the rally a little bit. Plus you have this A I effect, everyone's really hyping about it personally. I think it's less of a game changer,

more of a game improvement kind of tool. I don't really think it's that significant at this point in time. So it's not as revolutionary as people are making it out to be. That's what you're saying. Yeah. It's probably similar to, like office 365. It's good. It will make your life better. It will increase efficiency. Yeah. Change your

life all that much. Yeah. Ok. But do you think though at the mild pace and position that A I is throwing itself into the tech names and the tech industry, how do you think that is going to shape the path forward for the Mac Seven in terms of their stock performance and their growth? I think it was in the near term. You still be a driver because they're still hype around it. Take a look at NVIDIA, for example, they feel the immediate benefits and immediate effects of increasing A I demand

because they supply the chips, right? Yeah. And you can see backlog is still increasing quarter on quarter. Yeah, still so much demand. And so until this kind of dwindles down and enterprises stop spending on A I or at least stop increasing spending in A I, which is we're still kind of far away because right now you're seeing a lot of not just enterprises but a lot of sovereign nations. They're starting to build up A I infrastructure. Getting out their own A I models, everyone's kind of

playing catch up now. So that backlog is where the money is at. Yeah. So that's really driving the demand for A I products. And so that helps NVIDIA, helps Google, helps Amazon because of a lot of cloud infrastructure that is needed. So that is really the main kind of revenue driver in the near term. I'm not sure when the demand will subside because it's getting a bit out of hand right now. I'm inclined to agree. I mean, this A

I hype is really out there. It's really hard to ignore. Now, speaking of NVIDIA, I'm glad you brought it up because looking at the charts of the stock performance of the MAC seven over a three month period, one year period and five year period, the first whopping number that sticks out to me is Nvidia's stock. I mean, the three month percentage change shows 12.35 to the five year percentage change is 1094.64. What's causing this crazy spike? A big part of it is

expanding valuations. People expect a lot more growth out of them. Ok. So that just drives the price up in yearly, right? You compound that with a lot of operating leverage that companies like NBA has. They don't have to spend a lot to drive revenue growth. They don't have to increase their operating expenses that much. They don't really have to invest that much in capital expenditure. So their cost base is relatively fixed, more or less. I see.

So revenue just translates to earnings. Any additional revenue just translates to the bottom line and you see this big spike there. And that's what you see with a lot of tech companies and compared to maybe traditional businesses like consumer products, like maybe Coca Cola or mcdonald's, right, they don't really have this kind of leverage where one additional revenue dollar translates to 80 cents on the bottom line, right? So

that's really the main kicker. If demand slows down naturally, you start to see it kind of slow down a little bit. OK. Is this what will spell volatility for the tech sector? Is that why they're so volatile initially? Yes, because at the same time, a lot of these companies are still in their growth stages, right? So exponential growth, exponential expansion, right? So they're kind of like adjusting not just to demand but also to what they need to do in order to expand. Yeah. OK. Yeah.

So once this growth kind of slows down and we're actually seeing it a little bit with the more mature companies like me, Google Apple, especially Apple is very mature actually. So growth has kind of slowed down a little bit. I mean, they're still growing faster than the average company on the S and P 500 but it's no longer your 30 40% year on year. Ok. So you're starting to see these companies slow down a little bit and mature a little bit.

Whereas on the back end of the magnificent seven Tesla, NVIDIA, they are still relatively new compared to Apple. Yeah. Yeah. And so they are a little bit earlier in their growth stages. So there is a little bit more room to run for that. I see. So it's not necessarily that NVIDIA and Tesla have better value growth. It's just that there are newer players in the game and that explains the exponential increases that we're seeing. It's just where they are in the business cycle and where

they are in the consumer demand cycle. Ok. Well, that's a really good explanation. Now, I have a clearer idea of why certain names are just performing better than others. It's not necessarily an out performance per se. It's just where they are in their business lifespan, right? So one thing that I want to know is how much do these guys cost me if I want to buy alphabet, if I wanna buy apple shares, how much am I looking at? Because if they're so high,

does it become unsustainable and too expensive to buy? Are they worth it? So price is just one element of it, I mean, it's all relative. So what you're really looking for when you talk about value, most of the times you look at ratios. So price to earnings ratios, price to sales ratios and you look at it as an industry whole and what this company is, is priced at versus that particular industry, right? What was something like price to earnings ratio, tell you as an investor?

So it gives you basically an idea of whether a stock is overpriced compared to its peers or undervalued, right? So it's a relative valuation, let's say NBA right now is priced at about 40 times earnings forward price earnings. You can't compare it to a company that has much lower growth and maybe has a price earnings ratio of eight times if they are in a totally different industry and in a totally different part of their business cycle and growth stage, right? So it's all

relative straightforward. Yeah, when you look at the stock price, it really doesn't tell you anything because it doesn't mean that because NVIDIA is 700 bucks versus apple, that's over 200 bucks, you know, it's more expensive. Yeah. Yeah, it's just a relative term. So what are the factors should an investor consider then when deciding which of the Mac seven stocks to buy? So I think firstly, you got to figure out where's the demand flowing to right now.

So if you look at the seven of them, by far, the weakest one would probably be Apple actually because everybody kind of has an iphone. Yeah, the only way they grow their iphone revenue is when people upgrade their iphones, right? So usually you've got this 3 to 4 year cycle. And over the last few years, they haven't actually raised their prices on their pro models or any of the iphone models. Right. So the average selling prices hasn't really

been increasing that much. And if your user base is growing maybe 3 4% every year and you don't really raise prices, then you have to look to other areas for growth. And right now they're seeing a little bit coming from their services. So if you think about Apple TV, subscriptions and so on, but because most of the revenue comes from selling iphones and that's kind of taken a back seat a little bit. They are in terms of revenue growth a little bit weaker compared to the rest on the flip side. I

don't want to keep talking about NVIDIA. But if you know, if people keep wanting to invest in A I and there's no need for their A I GP U si mean one GP U that they're selling is like $30,000. So if you just calculate how many units are being sold, I don't need to, I think that number alone was mind blowing. Yeah, I mean, it's very different compared to a consumer and video GP U that

we have in our computers. It's like 300 bucks bucks. Yeah, I mean when governments and private sector companies are buying them whole in big volumes that changes the whole game. Yeah, I mean, you're talking about like billions and billions of dollars. Wow. Yeah, I mean when you just look at earnings calls for matter, they mentioned that by the end of this year they want to have 600,000 GP us like worth of gps. Yeah.

So I mean you just calculate how much you're spending 600,000 times 30,000, you know, roughly are laughing all the way to the bank for the next few years. So it's really the growth story that matters here because it's the mileage that it gives you as an investor. Yeah, yeah, it's really a growth story. Ok. So we talked about how sometimes the tech sector can be quite volatile but it's not as volatile as other

kinds of stocks out there. Still, they've experienced pretty drastic movements in a relatively short period and we talked about this earlier. Some even believe that there's a performance dispersion that has led to a disproportionate increase in stock valuations relative to the rest of the markets. And I guess when they do that, they are comparing it to equities. Do you think that the mag seven are indeed overvalued, overweight? I don't think as a group they're overweight because the

earnings potential is really strong. But if you nick, obviously, some of the companies probably a little bit more overvalued compared to others. So it's not fair to say as a whole, they are overvalued. If you're looking at other consumer equities or healthcare, you know, other defensive wise talks out there. So if you invest in them, you really need to have kind of the stomach to be down like 10 15% 1 day and be ok with it because you know that they can make it back

in three days. I think it boils down to why you've chosen to invest in that particular company, right? Because like you said, the gross story matters, the value matters where they're spreading their revenue to where they're gaining the revenue and reinvesting the revenue as well, right? So the Mac 7 may have had its origins in Fang as

I prefaced earlier. But there are still key differences that the thing that sticks out to me immediately would be Netflix because I don't necessarily see Netflix as a tech stock per se. It's a very consumer stock, but then the lines are blurred, right? Because a lot of tech companies are consumer driven. So tell us about the key differences here. How do I tell what a true mag seven versus a Fang stock? So actually the mag seven, I believe at the time it was coin

is because they were the biggest seven companies, right? Tech company. So Netflix had, I think like 60% draw down in price. So they kind of fell out of it. I think at the time they were maybe only worth only worth $200 billion. Whereas the rest, you know, they're like closer to one trillion. I mean, it's a, yeah, so

that's why they got dropped. And also because streaming companies in general if you take much as Netflix, but even to some extent, Disney or Spotify, the way they earn their revenue and the way it translates to earnings is, is a little bit more constrained because they really bank on just two things. One is user growth and two raising prices which just happened by and three to a small extent nowadays, it's starting to incorporate a little bit more digital advertising in their business model.

But for the most part, right, it's how much dollars can I increase, right? Without losing all my customer. Yeah. Yeah. So there is that limitation then for companies like the streaming platforms. So economy driven volatility aside, tech stocks do face some risks including regulatory risk purely because of their size and their

global reach. And as you rightfully pointed out early in the conversation because of how new they are in terms of market players, what are some of the regulatory risks and what's the impact of those regulatory risks on these tech stocks immediately? I'm thinking about me and the hearing in the US Senate, for example. So there are two main regulatory risks right now and it's been going on for the last few years. One would be data privacy because all of these companies, they take all

your data whenever you use them. And so regulators are trying to draw clear boundaries between what you can and what you can't do. And this has been a relatively new phenomenon where they are using a lot of data churning, a lot of data to drive more insights. Obviously, with the event of higher computer technology, better computers, you've been able to do that. The second area which is also very important and it has a lot of scrutiny,

especially in Europe is around monopolistic practices, right? And that actually has a bigger impact, I think because look at companies like Google that essentially a monopoly in multiple business, I mean, Google Maps. Yeah, Android. So they've gotten so big and the downside for this regulation is that you will have a lot of smaller players, maybe smaller news outlets, smaller advertisers claiming that, you know, Google

is bullying them because they are so big. Yeah, which, which is a fair argument in Europe. They take it really seriously. They impose serious punishments up to I believe 10% of their revenue from the last year. And then on top of that, they're able to break up the company or at least try to break up your company into smaller bits. We've seen that actually done in China somewhat with Alibaba. What regulators have kind of done? China is a totally

different animal. Oh yeah. But, but when you look at Europe and North America, that's kind of the biggest downside risk for a lot of these companies because if you break them up, then obviously they don't operate as efficiently because have to have separate teams.

You got to spend a little bit more money. So you use a little bit of your operating leverage and a little bit of your synergies and investors just don't really want it because, you know, if I'm going to invest in a company that's so big, I don't want them to be broken up. Exactly. Yeah, you lose all their competitive advantages. Yeah. exactly. So those two will be the main risk in terms of regulatory oversight. Another risk that is actually quite important nowadays is your geopolitical risk.

And what we're seeing with China and the US, you know, us banning a lot of technology, a lot of the high end chips. So that has really impacted NVIDIA a little bit. Fortunately for NVIDIA, a demand is so strong that for right now it doesn't really matter, but China makes up about 20% of Nvidia's revenue. So you kind of have that taken away if you did have strong demand and you are just a regular company, I mean, 20% of your revenue gone is a lot

like in three weeks, essentially is huge. It's a big chunk. Yeah. Right. So these kind of ongoing tensions, you can't really control it. You just got to sit back and watch and hope that they can work it out as an investor. You have no idea what about key person risk. You're looking at the Elon Musk and Mark Zuckerberg's of the world. Is this a potential major risk or pretty minor? You think? I think for most of Mac Seven it's pretty minor

because they have very strong teams around them. So you have to know when you're looking at a company like this on top of the financial performance. Who is the guy at the top? What kind of character is he? Is it true that some investors actually

buy into the company because of that key person? Yeah, so I mean, this is huge in maybe not so much public equities, but when it comes to private equity venture capital, that's something they look at because you want to see what kind of leader your CEO is, right? So here's the other thing that made the news very recently meta announcing that they would be paying its first ever dividend to investors. And word is that Amazon and alphabet are also going to follow suit.

Have they indeed reached that level of maturity in the market where they can pay back their investors and not just for the one year, I mean, once you start doing that, I'm sure investors are going to expect you to continue paying some form of dividend over the next

at least five years. Yeah, so definitely it was big news for a matter, it really showed their maturity as a company especially, you know what happened over the last three years when they were just pushing growth and then I was like, oh no, we are going to focus on efficiency. But when it comes to returning value to shareholders, they've always done that through share buybacks, their dividends is not on top of the share buybacks that they are already doing. So,

they just are splitting the capital allocation accordingly. For example, if they're buying back 100 billion worth of shares, now, maybe they're going to buy back 80 billion and then do 20 billion in dividends by making these kind of

strategic moves. It shows what kind of company they are maturing into and it probably would appeal a little bit more to dividend investors, for example, or for people that would have stayed away in the past because they were unsure of what kind of trajectory this kind of company was heading towards. Right, right now, they've mentioned that they're going to be just doing quarterly dividends for the foreseeable future. So they've really laid out the lines,

you know, we're going to do this. It's not a one time thing we're going to continue doing it. That's a huge commitment. Yeah, and I think that has given investors quite a lot of confidence. You can see that the stock price this year. Oh yes, it has surged tremendously and obviously it begs the question, have they become too big to fail? I don't think so. I think they still have to be quite focused, especially if they are doing a lot of investments in R and D and capital expenditure, right?

When you grow your assets that much, you still have to be somewhat prudent in terms of how you're allocating money. Yeah, there will come a point where their user base is also going to be saturated right now. They are at 4 billion users. Yeah, I mean, that's like almost 60 70% of the world's population, right. So how much more can

they actually grow in terms of user base? And then on the monetization side, yes, they're still in the early stages, but they will peter out a little bit in the next 5 to 10 years. It almost feels as if A I came at the right time. Like the timing is impeccable that they're able to leverage on this for then the next chapter of their growth story. I think the A I hype came at the right time because these companies have been doing it for the last 10 years. Yeah, exactly.

It's nothing new to them. Yeah. So as an investor looking to add a tech stock to a portfolio, what do I need to be paying attention to particularly deciding on Mac Seven, I'm thinking about things like Time Horizon, you talked about tech stock investors being the kind that needs to have the stomach for it.

So I'm not thinking long term here. This has to be a quick turnaround or a medium term outlook or can they still be long term stocks that we can invest in actually for more volatile stocks like tech stocks, you really want to have a longer time horizon because it kind of mitigates a lot of the volatility risk at the same time, if you have companies like the max seven, that fundamentally are very sound, if you look at their financial statements, you know, the flush of cash,

you know that if anything inadvertently happens, they'll still be able to function, they will still be able to pay out their investors. And so actually these kind of companies, yes, you can do short term trading and stuff like that. But if you really want to look long term, that's probably where you're going to be able to maximize your returns. So then you really have to look at how much value can I get at this current price? If you think maybe I can get a little bit more, you

wait for a pullback, right? Because inevitably it will happen. Yeah. And then you find that, ok, this is somewhere where it's a bit more value to me as a company. It doesn't diminish the performance or the capabilities of the company. It's just where you want to enter and then you just hold it for 10 years because I'm quite sure in 10 years all of these companies are still going to be. Oh, yeah, it's hard to imagine a world

without them. Now their game changer, they are tech disruptors for the most part they all basically use every day. Yeah. It's almost as if we can't live without them. Yeah. So my final question to you is, do you think max seven will still be mag seven in 2025? Yeah, I think in 2025 there will still be mag seven. Right. The seven is still there. I'm quite confident that this will happen for at least the next 2 to 3 years. They'll still be up there.

Do you think anyone will drop out the way net fix it? I think the only company that has the potential to do that would be Tesla, the rest of them, they are very solid. Even though we talked a little bit about Apple and slowing growth, there's still a huge company, very high value, very high value because they generate a lot of revenue earnings are also good and they're very stable. It's tough to find a better company than Apple if

you're looking for something that's stable, right? It may not give you the 30 40% performance that you want, but right now, not right now, but they will still be pretty solid better than most other companies. You know, you just gave us a really detailed lay of the land, Jonathan. So thank you so much for helping us understand the Mac seven, the whole tech stock industry, especially as an investor as well. What to look out for. So, thank you very much. You're welcome it was fun. It's still

a very exciting space to watch. However, the journey turns out just got to make sure that you know, you as an investor know what you can stomach as Jonathan painted. If you enjoyed this episode, please let us know by leaving us a comment or a rating on any of the platforms you are listening to us from, we're streaming on Apple

podcasts and Spotify as well as youtube music. Let's not forget the team behind Money Talks, Joanne Chan Tiffany, Jaini, Johari, Christina Roberts win and I'm Andrea He catch you next time.