Tesla woes get investors talking about its successor in 'Magnificent Seven'

The recent slump in Tesla stock threatens its place in an elite grouping of companies that powered a surge in US markets in recent years, experts said, while triggering chatter of an AI-linked replacement for the electric automaker.

The so-called "Magnificent Seven" - Apple, Microsoft, Amazon.com, Alphabet, Meta Platforms, Nvidia and Tesla - staged a blistering rally last year and pushed Wall Street to record highs.

The group holds a collective weight of 28.6 per cent in the S&P 500, up from 27.8 per cent at the end of 2023. That is close to the highest weight ever for that group of stocks, according to LSEG data.

A successor to Tesla will likely be one that would be able to monetize the booming demand for artificial intelligence, a dozen institutional investors told Reuters.

"It's Magnificent 6," said Brandon Michael, senior investment analyst at ABC Funds.

"Tesla has a lot of issues with competition from Chinese EV makers, price cuts, shrinking margins and even Musk said it himself that the Dojo supercomputer is a long shot."

"And if I were to put a seventh in there, it would be Broadcom, which is a leader in custom silicon and is facilitating the AI revolution."

Tesla's stock, which is down nearly 24 per cent so far this year, formed a "death cross" on Thursday, a sign interpreted by some traders as portending more losses. The death cross kicks in when the 50-day moving average falls below the 200-day moving average.

Waning demand due to high borrowing costs and lower government subsidies, and price cuts across geographies are among challenges the EV pioneer is navigating.

Apple, the other laggard in the group, is down 2.94 per cent as of last close. Its shares fell 2.2 per cent on Friday after the company forecast a drop in iPhone sales and targeted overall revenue $6 billion below Wall Street expectations.

"What's changed now is that we flipped over the calendar to 2024 and this is the "show me" year where people are looking at companies' abilities not just to use AI, but to monetize AI, therefore, some of the shine has come off Apple," said Art Hogan, chief market strategist at B Riley Wealth.

Meanwhile, mounting optimism around AI has lifted shares of Nvidia by 31per cent this year, Microsoft by about 9 per cent and pushed a popular gauge of US chipmakers to an all-time high.

Apple was dethroned by Microsoft as the world's most valuable company in January as investors were disappointed by the lack of AI-related plans in its business model and subdued China demand.

Meta soared 21per cent to a record high on Friday after its first dividend and Amazon.com jumped 6.6 per cent as it beat fourth-quarter revenue expectations.

The "Magnificent Seven" follows earlier investor phrases such as FANG, which initially was Facebook, Amazon, Netflix, Google, and then became FAANG to include Apple.

During the late 1990s tech boom, investors piled into the so-called "Four Horsemen," which were Cisco Systems, Intel, Dell Computer, and Microsoft.

Who are in the race?

Chipmaker Broadcom, which ABC Funds' Michael suggested would be key contender, has doubled in value in 2023, with traders betting on a boost from the company's recent acquisition of VMware.

Another market favorite is Advanced Micro Devices, a close competitor of Nvidia, which produces chips for all graphic processor units needed for AI and jumped over two-folds in 2023.

Chris Beauchamp, IG Group's chief market analyst, said although the chipmaker's market valuation pales in comparison to the EV giant's, it could step up to the plate given it's another big beneficiary of the AI drive.

Most others said the group might just shrink to six members and a new catchphrase might just emerge, with some already referring to the smaller set as the "Magnificent Six".