Magnificent Seven Struggle with Valuations Amidst AI Boom
The 'Magnificent Seven' companies, which include Apple (AAPL), Nvidia (NVDA), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Tesla (TSLA), have been leading the charge in the AI revolution.
However, these companies are struggling to justify their valuations, with some facing negative free cash flow due to exorbitant capital expenditures (capex) on AI-related infrastructure. For example, Alphabet's capex is expected to reach $195 billion to $205 billion in 2026, while Amazon's will be around $220 billion.
On the other hand, companies like Apple and Tesla have kept their capex at historically normal levels, resulting in positive free cash flow. However, this comes with less attractive long-term growth prospects. For instance, Tesla is currently trading at 139 times Wall Street's consensus earnings per share (EPS) for 2027.
Investors are being forced to choose between accepting negative free cash flow and the hope that AI will boost long-term growth trajectories or dealing with unsightly valuations and steady free cash flow.