The Magnificent 7 Stocks: Analysis of Performance and Valuations
The Magnificent 7 group of stocks has experienced a 9% decline month-to-date through August 5th, trailing behind the broader market with the down 6% and the NASDAQ down 8%. Among the group, Tesla (NASDAQ:) and Nvidia (NASDAQ:) have been the relative underperformers, each falling 14% month-to-date, while Meta Platforms (NASDAQ:) has emerged as an outperformer.
Morgan Stanley analysts have noted that across the three most common valuation metrics - P/E, P/FCF, and EV/EBITDA - Mag 7 valuations are now 30% below their trailing five-year (T5Y) peak, 5% below their T5Y average, and 50-60% above their T5Y trough valuations. This is in contrast to the NASDAQ 100, which is 20% off its five-year high and 37% above its five-year low, and the , which is 56% off its five-year highs but 50% above its five-year low.
However, when adjusted for future growth prospects, the Magnificent 7 trades at a material discount to its T5Y valuation average. Forward earnings per share (EPS) growth is expected to accelerate compared to the trailing five years, with a 25% forward CAGR versus a 21% trailing CAGR. This implies a median Mag 7 forward PEG ratio of 0.8x, compared to a trailing PEG ratio of 1.3x.
Analysts have concluded that while Mag 7 valuations still face significant downside valuation risk in a black swan or recession scenario, current Mag 7 valuations relative to future growth prospects are attractive after the recent drawdown. The median PEG ratio is nearly 40% lower than the trailing five-year PEG ratio, indicating potential for mega-caps to continue outperforming small caps.
Furthermore, Mag 7 consensus revenue revisions, excluding Nvidia and Tesla, have increased by 2% over the last 12 months, while EPS revisions have risen by 16-21%. This suggests that 2024 results and guidance have slightly exceeded expectations, and 2025 expectations are on the rise. Mag 7 is also benefiting from operational efficiencies more than small caps, supporting the market's preference for quality and defensibility in this group.
In conclusion, despite the recent decline in the Magnificent 7 stocks, their valuations relative to future growth prospects are attractive. Investors should consider the potential for outperformance in the future based on these factors.