The “Magnificent Seven” stocks are a collection of the leading tech stocks in the world. But this year, they haven’t been doing well. The S&P 500 has surprisingly been outperforming nearly all of them. It’s particularly surprising given that the broad index is up only 11%. It’s doing well, but that doesn’t seem like a high bar for stocks to exceed.
Yet, there’s only one stock in the Magnificent Seven that has been able to beat it. Ironically, it’s the company that has been a bit of a laggard when it comes to artificial intelligence (AI): Apple (AAPL -1.83%). Year to date, it’s up around 25%.
What’s behind its rally, and could it go even higher?
Image source: Getty Images.
Apple’s cautious spending may be winning over risk-averse investors
While many tech companies are in an aggressive arms race in developing AI chatbots and models as quickly as possible to stay ahead of the competition, Apple’s been far more modest by comparison. In fact, customers have become frustrated with its slow pace with respect to AI offerings and its iPhones lagging behind rival phones.
As other stocks in the Magnificent Seven have been spending hundreds of billions of dollars and ramping up spend, Apple modestly forecast $14 billion in capex for its entire fiscal year, unchanged from a year ago. It’s perhaps no coincidence then, as investors have become more concerned about high levels of AI spend, that Apple’s been the stock of choice among tech investors.
Having a more sensible, calculated, and less aggressive approach to capex has endeared it to the broader market.
Is Apple stock still heading higher?
Apple has a terrific business, but the problem is that its stock is now trading at an exceptionally high premium — close to 40 times its trailing earnings. That’s a particular concern for a business that in recent years hasn’t often generated more than single-digit growth. There have been times when it’s fared better, but also times when it’s even performed worse.
Paying such a high premium for fast, high-growth business may be justifiable, but that’s not representative of what Apple is. It’s a safe, stable tech stock, but it’s not what I’d consider to be fast-growing by any means.
Investors who buy the stock at such elevated levels should tread carefully, as it could be vulnerable to a correction in the near future, especially if its upcoming results prove to be underwhelming. Apple is a quality stock to hold for the long haul, but I wouldn’t buy it at its current price, as its future returns may be minimal, and at worst, the stock could experience a significant decline given its inflated value.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
