Why One Analyst Says the 'Magnificent 6' Will Dominate Future AI Waves

Bank of America analyst Michael Hartnett awarded the title of "Magnificent 7," or Mag 7, to an elite group of seven high-performing U.S. technology companies. These seven stocks have significantly boosted the stock market in recent years. This group includes Apple (AAPL), Meta Platforms (META) (formerly Facebook), Amazon (AMZN), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), and Tesla (TSLA). These seven companies have benefited from trends in cloud computing, artificial intelligence (AI), electric vehicles (EVs), digital advertising, and other growth areas, and they are regarded as tech industry leaders. 

However, here we're referring to the "Magnificent Six," which D.A. Davidson managing director and analyst Gil Luria believes will continue to dominate the tech sector through the next AI waves. Since the AI revolution began, these tech titans have grown exponentially by incorporating AI into their products. In an interview with Yahoo Finance, Luria discussed how these tech titans - namely, the original Mag 7 lineup, except for Tesla - will continue to thrive in AI and computing over the coming years.

While Tesla is widely considered a tech company, Luria believes otherwise, classifying it as a car company. Among the Mag 7 stocks, Tesla has underperformed so far this year. Here is the year-to-date performance of each, as compared to the 17.3% gain of the S&P 500 Index ($SPX):

• Tesla stock is down 7.5%.
• Alphabet stock is up 10.7%.
• Meta stock is up 48.4%.
• Microsoft stock is up 13.4%.
• Amazon stock is up 23%.
• Nvidia stock is up 140.6%.

Let’s dig in deeper on this. 

Analyst Initiates Coverage on Meta Platforms, Alphabet

Luria initiated coverage on Meta Platforms stock, rating it a "buy" and setting a price target of $600. Meta Platforms owns a suite of popular social media platforms, including Facebook, Instagram, WhatsApp, Threads, and more. Every day, approximately 3.2 billion people use at least one of Meta's apps, according to the company.  

Overall, on Wall Street, Meta stock is a “strong buy.” Of the 44 analysts covering the stock, 38 rate it a “strong buy,” one recommends a “moderate buy,” three say it's a “hold,” and two rate it a “strong sell.” 

Meta's social media platforms account for nearly 99% of its revenue as part of the Family of Apps (FoA) segment. The FoA segment's revenue increased by 22% in the second quarter. Its Reality Labs (RL) segment - which includes augmented reality (AR) and virtual reality (VR) technologies - increased revenue by 27.9%, thanks to AI-powered Quest headsets. Meta's total revenue increased 22%, while diluted earnings increased 73% in the second quarter.

With a strong balance sheet, Meta is heavily investing in AI to strengthen both the FoA and RL segments. The metaverse segment presents numerous opportunities for the company to grow in the coming years with the help of AI.

Analysts following META predict that earnings will rise 42.9% in 2024 and 14.8% in 2025. Analysts have assigned a mean target price of $575.93 to META, implying a 9.6% upside potential over the next 12 months.

Luria also initiated coverage of Google's parent company Alphabet, with a "neutral" rating and a $170 price target. Overall on Wall Street, GOOGL stock is a “strong buy.” Of the 44 analysts covering the stock, 34 rate it a “strong buy,” three recommend a “moderate buy,” and seven say it is a “hold.” The mean target price of $204 for GOOGL implies the stock could potentially climb by 32% over the next 12 months. 

Aside from Google Search's dominance in the search engine market, Google Cloud contributes significantly to Alphabet's growth. Search accounted for 57% of total revenue of $84.7 billion in the second quarter. Total revenue increased by 13.5%, while adjusted earnings grew by 31.2% to $1.89 per share in the quarter. 

Google Cloud ranks third in the cloud computing market, after Amazon and Microsoft. That segment's revenue increased by 28.7% to $10.3 billion in the second quarter. 

Alphabet has integrated AI into all of its flagship products, resulting in exceptional growth in recent quarters. The company stated that approximately 2 million developers are now utilizing its AI infrastructure and generative AI solutions for cloud customers.

CEO Sundar Pichai emphasized during the quarter that the company is “innovating at every layer of the AI stack, from chips to agents and beyond.” Analysts covering Alphabet expect earnings to increase by 31.5% in 2024 and 14.0% in 2025. 

Luria has included Meta and Alphabet in his "compute sector" coverage, along with the remaining Mag 6 stocks. According to the analyst, "these six companies will continue to dominate in AI and spatial computing, and extend their lead from the sectors they're already in — desktop and mobile computing, cloud computing and advertising, computing." These markets necessitate "scale, reach, and capital," which these six tech titans possess in abundance. 

Why is the Analyst Bearish on Tesla?

EV giant Tesla also possesses the three qualities of "scale, reach, and capital." However, Luria argues that Tesla is just a car company and will remain so, given that automobiles account for approximately 90% of its revenue and profits. As a result, he doesn't see Tesla joining the Mag 6 group in dominating the tech world in the coming AI waves.

For context, Tesla has expanded beyond EVs into energy storage, solar power, and automation. Nonetheless, the automobile segment generates 78% of total revenue - and in recent quarters, the automobile business has struggled. 

In the second quarter, revenue in the automobile segment fell 7%. Intense competition in the EV industry, as well as other macroeconomic pressures, have forced Tesla to reduce prices, putting pressure on its profit margins. While CEO Elon Musk believes this is a short-term issue, Tesla is unlikely to grow as rapidly as the other tech titans in the coming AI waves. 

Overall, on Wall Street, Tesla stock is a “hold.” Out of the 36 analysts covering TSLA, 10 have a “strong buy” recommendation, one says it's a “moderate buy,” 18 rate it a "hold,” and seven suggest it’s a “strong sell.”

Tesla stock has surpassed its average price target of $198.29. Its Street-high estimate of $310 suggests the stock could potentially climb by 34.8% in the next 12 months.

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