The Magnificent Seven

In the investment media, the story of the Magnificent Seven is trying to break the grip of consistent commentary on interest rates and inflation. It is not a contemporary reference, so you must be of a particular vintage to remember the critically acclaimed Western movie.

Like the movie, the tale involves seven protagonists, all mega tech companies: Microsoft, Amazon, Apple, Alphabet (Google), Tesla, Nvidia and Meta (Facebook/Instagram). All have delivered strong returns for investors in recent times and significantly impacted various sectors. 

In a recent piece of research, Deutsche Bank calculated that their combined market capitalisation would make them the second-largest stock exchange in the world. In other words, they are so big that they are worth as much as all the stocks in Japan, France and the U.K. put together.

The Magnificent Seven film is a classic story of good versus evil, with no apparent parallels with this group of leading technology businesses. However, like the main characters in the movie, each has a different background. 

Microsoft, currently the world's largest company, is best known for its Windows and Office 365 products, but recent growth has been fuelled by cloud services and its investment in one of the most recognised AI technologies, ChatGPT. The share price has grown by just shy of 270% over the last five years. Meta, more familiar to most as Facebook, has benefited from the popularity of social media, and its reach has made it incredibly attractive to advertisers. As of the end of June 2023, active monthly users were reported at around 3 billion.

Amazon's role in changing the shape of retailing is well documented, but the value generated by their cloud offering, Amazon Web Services (AWS) is perhaps less well understood. This runaway success has resulted in a business worth an eye-watering $1.86 trillion. Online search and advertising have fuelled Google's growth to become a feature of our daily lives and a company with over 182,000 employees worldwide.

Nvidia is perhaps not quite so recognisable a brand. Its speciality is graphics processing units, or GPUs, essentially chips which are found in various technologies, such as personal computers and gaming consoles. Its growth owes much to the development of artificial intelligence. The speed and energy efficiency of GPUs versus other processors makes them ideally suited to the heavy lifting of machine learning. 

Remarkably, the Nvidia share price has grown by almost 2000% in the last five years, compared to 83% from the S&P 500 (the largest 500 companies in the US).

Apple's astonishing growth, placing it second among the world's largest companies, is strongly related to the worldwide smartphone phenomenon. Tesla represents the origin story of the electric car market. The latter has been another incredible performer, with a share price growth of just under 850% over five years, and Apple is now valued at $2.66 trillion.

Concentration risk

But is it all good news for investors? If you have held these companies directly or through a collective investment scheme such as our Esk Global Equity Fund, they will have done well for you.

However, their share price growth is already fragmenting, and given that this small group of companies has been responsible for much of the growth in US equities, investors should be concerned about what to expect if their fortunes turn. AI, the latest trend in technology, is heavily linked to the immediate growth of these businesses and is still very much in its infancy. History tells us, specifically in the form of the dot-com bubble, that not everyone wins when new technologies emerge. 

The Magnificent Seven's further upside potential and immediate downside risk are a great example of why the needs of long-term investors are typically best served with diversified investments that skillfully balance risk and reward. 

Sources: Share Price growth from Bloomberg and company valuations from Google Finance


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Important Information

The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.

Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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