Magnificent 7 Trillion-Dollar Crash: What To Watch Before Buying the Dip on Amazon, Microsoft, Alphabet and Meta
Some of the so-called “Magnificent 7,” the popular tech stocks that have had an incredible run over the past few years, have come down in recent weeks, alarming many investors. Some worry that the party is over, and additional losses await, while others see it as a classic buying opportunity.
Whichever side of the fence you find yourself on, there are some things to consider before making any investment moves.
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The Trillion-Dollar Number, Explained
According to CNBC, roughly $2.3 trillion was erased from the combined value of Microsoft, Nvidia, Alphabet, Apple, Meta, Tesla and Amazon in June. Microsoft alone dropped about 20% for the month and Wall Street darling Nvidia tumbled roughly 13%. Apple and Amazon, two other very popular consumer stocks, each slid around 8%, per the same CNBC reporting.
That’s a lot of red for companies that have posted stratospheric returns in recent years. Especially when the broad market itself has held up relatively well in the midst of this minor tech wreck.
What Spooked Investors
Tech booms and busts are often different sides of the same coin. Part of the reason the Mag 7 have had such a tremendous run is that investors are excited about how they are building out their AI infrastructure. The general thought in the investment world is that “AI = good” -- so the more these big tech companies can dominate the AI conversation, the better off investors will be in the long run.
The problem is that building chips, data centers and server farms is extremely expensive, and a chunk of that spending is financed with debt, according to CNBC. For a while, Wall Street didn’t care about the massive leverage and interest expense caused by this debt. The AI story was simply too exciting.
But that patience is running thin among investors. Investors now want proof that these AI wagers will pay off in terms of real revenue and profits. A bit of fear has crept into the AI trade, and some of the Mag 7 have been paying the price.
Is This the Dip Worth Buying?
No analyst or investor can predict the short-term movements of a stock. Meta, for example, popped 10% on the morning of July 1 on news that the company “is planning a cloud business to sell AI computing power,” according to Bloomberg. This shows that investors are ready to pounce on AI opportunities.
In an interview with CNBC, Dan Ives said Big Tech is poised to rebound in the second half on the back of a multiyear AI super cycle. Ives, the global head of technology research at Wedbush Securities, said the short-term selling is overdone, based on unrealistic demands of investors for short-term AI profitability.
Even if you believe in Ives’ thesis, be prepared for volatility. July is earnings season. When big tech companies make their quarterly reports, their stocks can be volatile, potentially moving 10% or more in a single session. Buying the dip now means being able to stomach this type of volatility.
What To Watch
As an investor, buying the dip in Mag 7 stocks means having conviction that these companies will reap the rewards of their AI spending. But this is a long-term play. Buying the dip in pursuit of short-term gains is pure speculation, not investing.
Here are the things you should watch to help you decide whether or not buying the dip on an individual stock makes sense:
Cash flow and debt trends: Companies are currently spending billions of dollars on AI infrastructure. This money has to come from somewhere. Find out if a company has sufficient cash flow to finance this spending or if it is taking on a dangerous level of debt to raise needed funds.
Capital expenditure guidance: If a company continues to raise its AI spending without explaining how that will translate into revenue, that’s a yellow flag.
Management commentary: Make sure company management has a specific plan, rather than just vague talk about AI being a "long-term opportunity.”
The AI trade certainly isn’t over. There’s certainly still money to be made. But investing means owning companies with clear, monetizable long-term plans, not trading in and out of whichever ticker symbols happen to be down.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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