There’s something quiet going on with those large cap technology stocks that everyone knows and owns.
That’s right, you may not have 100 shares of Apple (AAPL) or Microsoft (MSFT) or any of the other Magnificent Seven Companies, but there’s a good chance that you own their stocks.
Mutual funds, Exchange Traded Funds (ETFs), pension funds, almost anything that is a retirement vehicle owns these stocks.
They truly are the market. Which is why it’s always important to maintain an eye on their activity.
Over the last few months, we’ve seen an interesting trend begin to develop.
Wall Street analysts have slowly started to downgrade the Magnificent Seven stocks.
Just last week we saw downgrades of Microsoft (MSFT), Google (GOOGL), and Apple (AAPL).
The moves come as analysts saw these companies forecast mixed revenue outlooks during last quarter's earnings season.
This isn’t something that’s going to cause a crash or anything that’s going to bring the market down significantly, on its own at least.
No, this is an interesting shift in sentiment that could be set to reset the growth trajectories of these companies as investors begin to ask whether the Artificial Intelligence is ready for its closeup.
AI is making waves and increasing revenue and profits in some areas of the market.
But the elite Magnificent Seven group of stocks stopped reflecting that exponential growth potential a few quarters ago as performance started to level out.
Since July, the Magnificent Seven companies have turned in an average performance of +1% as a group.
That compares to the Nasdaq 100 performance over the same period of just 2%. Clearly the leadership of the market is slowing or shifting.
Well, put simply, investors are starting to feel that the AI technology companies have done their exploding. It’s time for margins and profits to normalize while they look for the next level of AI technology.
That’s likely to be in the data centers and energy solutions that we’ve hear talked about a lot lately, but it appears that for now, the hardware aspect of the AI growth boom for the Magnificent Seven has slowed.
Check out my recent article, Four Stocks Set to Outperform as "AI Goes Nuclear", for more on this.
AI Service companies are those that are implementing the hardware and technology that the Magnificent Seven and other AI “architects” designed and built with companies to achieve several goals.
Efficiency, productivity, management and innovation, these are just a few of the objectives that companies like Salesforce.com (CRM) and IBM (IBM) are using AI technology to achieve.
And it’s building their businesses and share prices.
Just last quarter, Palantir led the AI service companies in growth, posting year-over-year revenue figures that were 27.2% higher.
Check out my latest YouTube on Palantir's Stock Price Outlook.
Only one of the Magnificent Seven stocks hit that number or higher, NVIDIA (NVDA).
NVIDIA’s revenue grew by an incredible 122.4%. That number was down from 262% in the previous quarter and 265% the quarter before that. As an example of how it may be hard for NVIDIA to continue scaling the level that has impressed investors for the last two years.
The revenue growth is pushing valuations higher.
Since July 1, this small group of AI Service companies has averaged returns of 33%. That’s compared to the 1% from the Mag Seven stocks.
This group is on the move.
Let me be clear, this is not a “sell all of your NVIDIA and buy these stocks” moment.
Far from it.
No, this is the moment where the long-term investors are looking to the horizon and diversifying their portfolios to increase their holdings in these and other AI Service companies.
Now, there are going to be a lot of companies that claim that AI is going to help them, but be careful.
June 2023, Wendy’s announces that the company is implementing AI to improve their restaurant efficiencies.
Shares are trading 10% lower now.
The same can be said for a long list of companies. Personally, I’m impressed that White Castle has implemented some AI in their ordering process and app but remember that the technology is only as good as the employees on the other side of it.
Just finding companies that are trying to implement AI into their business is not enough, that won't "move the needle" when it comes to earnings.
Instead, find the companies that are consulting, designing and implementing AI into companies' businesses for them.
Those are the companies that will benefit from the implementation of AI.
Keep an eye on the companies who’s business it is to get AI into other companies.
Companies like IBM, Salesforce, and ServiceNow (NOW) fit that bill to a “T”. Companies are going to be working with these and others like them to let them build the systems while they run their own businesses.
Focusing on the shift from AI Technology to AI Services is likely to put you in the right place to rise the wave of AI profits beyond its initial technology swell.