Tech stock winners

0:05Pushkin. They are scintillating. They are shimmering. It's the Sexy Seven, folks. The Magnificent Seven tech stocks driving not just US stock markets, but global stock market returns. In July, two of our Unhedged contestants chose their favorite of the seven Magnificent tech stocks. Today on the show, we look back at the Magnificent Seven in 2023 and what we might expect in the year ahead. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined from London by Elaine Mooreslaw-Moore. Hi. And from New York, Robert, value this Armstrong.

0:49Hola. All right, Rob and Elaine, as you know, back in July, you both picked in a draft style competition three of your seven favorite Magnificent Seven tech stocks. Listeners, we'll run through each of the picks one by one. And at the end, Elaine and Rob's performance are going to be compared on the basis of average total return across their portfolio from July 13th to the end of December 2023. But before we get into each of your portfolio picks, we got to start with the one that was not picked, and that was Tesla. This ended up being very prescient when all is said and done. Tesla was the worst performing of the seven magnificent tech stocks in the second half of 2023, down 10.6%, despite the Cybertruck rollout and Elon Musk's aggressive price cutting on some of his units didn't really work out for Tesla in the second half.

1:39Yeah, well done us. But I don't know if we can claim to know what was about to happen, because I don't think Wall Street was expecting it either. The share price cuts were sort of quite dramatic after the revenue came in in October below expectations. Everyone knew that profit was going to come down because it's been cutting prices to compete with these cheaper Chinese electric vehicle makers, but revenue coming down too. And also it's now been overtaken as the world's biggest EV maker by BYD in China. So it's just not had a great time. To give us some credit, we do know that as much as Tesla is an impressive and innovative company, its stock is a garbagey piece of speculative trash.

2:22Way overvalued, bought for the wrong reasons. No sensible person would touch that stock with a 10-foot pole. Well, you can argue that's also because of who owns it, right? It's a lot of retail investors and it's a lot of people who are interested in Elon Musk and everything that he does and so are buying it based on his tweets or what he's up to in the world rather than what the company's up to. So you have to make an absolute distinction between the company and the stock. Not that the company is perfect. I think the Cybertruck is a manifestation of all the bad things about Elon Musk and none of the good things.

3:00I couldn't disagree with you more. I love it. There's so many polite, sleek designs out there in cars and in all tech products. I love the fact that the Cybertruck is just hulking and big and ugly and weird and steel gray. Looks like it's indestructible. I'm coming around to this idea. I like that case for the truck. It kind of celebrates itself. And in a way, that's the case for Elon Musk, right? Is that in a world of predictable and gray executives, here's somebody who knocks over some China, which is cool. Yeah. The first time that he was videoed driving a Cybertruck, he bashed it into a pole.

3:40and yet people still want to buy the Cybertruck. It's already been an accident in California, smashed up the other vehicle. That reflected not at all badly on the Cybertruck or on Tesla. I think the Cybertruck's going to be, I mean, I don't think the sales are going to be huge because I think you can barely fit it onto any road. But I don't think that's going to do the stop much harm. That's not the point. Looks good in the driveway. Rob, I knew I'd taught you around. You were so easily swayed. Yeah, no. Rob is now pro Cybertruck. But congrats to you both for not picking Tesla, the big loser of the second half of 2023.

4:14Turning now to the ones that you did pick, and we'll start with the best performing and we'll move down the list. Rob, your best performer of the second half of 23 was Amazon with a total return of 13.1%. This was not a stock that I think anyone was necessarily scrambling to get. It wasn't at the top of anyone's list, but it ended up doing quite well. This is a good example of something that happens all the time in the stock market, which is getting the right result for the wrong reasons. I picked Amazon despite the fact that it's a highly economically sensitive business because of its retail business.

4:50I thought there were some worries about Amazon that would probably go away and that it would do okay, despite those worries. But the downside was the economy, its economic sensitivity, but the economy came through huge in the second half of the year. So Amazon did well. So a little luck has a very tonic effect on any portfolio. I do wonder what's going to happen to Amazon with the rise of these Chinese, extremely cheap e-commerce companies that are taking over, particularly young consumers, how that can't be a huge threat. My kids like those companies. I'll tell you that. They are underpricing Amazon via a large margin.

5:27Good for them. That must be a problem. I will say I did purchase one of these cheap Chinese e-commerce sites, Temu, I think it's called. And I immediately got a suspicious charge of my credit card and had to cancel it. So that's one point in favor of Amazon. Well, Elaine, it was a similar story for your best performer, which was Google total return of 12.2%. This was your third pick and no one was really in a rush to snap up Google. Yeah, it wasn't my favorite. And the thing about Google is that although it invests quite a lot in artificial intelligence, AI could also potentially completely wreck the company because if you don't need to search for results, if you just use AI to come up with an answer, then you eliminate the search that powers Google's entire revenue generating business.

6:09But we don't worry about that, obviously, this year because advertising revenue went up and cloud revenue went up too. And so the stock did well. Elaine, how do the ongoing privacy wars fit into this picture? Well, that's going to help Google a lot because it has just started to disable third party cookies for users of its Chrome browser. So these are the things that track you when you're going around the internet. Websites can follow you around and use that data to then target advertisers towards you. Google has begun to turn that off. It's talked about it for a long time, but it's actually started to happen now.

6:45Google itself, of course, is going to keep extracting lots of information from you. So if you're an advertiser, you need Google because Google now has that information. You won't have it anymore. On the other hand, though, there's a quite serious antitrust challenge that really gets to the heart of Google's advertising business model. Yeah. The US Justice Department is very exercised about the search engine supremacy of Google, and it's brought an antitrust lawsuit against the company. I think we're expecting the closing arguments in May, so not that far away. And this is the entire business of Google.

7:16What it argues is that Google uses its dominance in search to basically cover half of the online digital advertising market. And they're saying that's not fair because what other search engines are there out there? I'm a duck, duck, go loyalist. Sure you are. Well, the other big company in digital advertising is, of course, Meta. And Rob, that was your second best pick in the second half of 23. Meta, total return of 12.2%. Seems like another advertising story. They hit record sales in the third quarter. Despite all the AI-generated images that Zuckerberg is promoting and Meta's AI chatbots and all this AI stuff.

7:53It just comes down to they sold more ads. More people clicked on them, more people watched their ads. Sure does. No young people use it, but the fact is they got a gazillion, jillion users. That's the right number now, right, Elaine? A gazillion, jillion. That's right. I think so. That's what we report. Worldwide. And if you don't let Mark Zuckerberg screw it up, this is a hell of a business. And Mark Zuckerberg shifted into not screwing it up mode for the last year or so, and it's been great. The cost cutting has been incredibly effective and very much appreciated by all the investors. I think the election cycle we're coming into, that will be really interesting to see what happens to ads.

8:30I think it will give another boost to ad dollars. Definitely true. No recession means more ad spending. Throw the political campaign season on top, but that seems to be a pretty good environment for meta, at least in the medium term. And look what we're not talking about, metaverse. And that is exactly why the stock has done well. Yeah, it's exactly right. Well, Elaine, your second best pick of 23 was NVIDIA, total return of 7.7%. This one, I think, was maybe a little bit more muted than you were expecting initially. I've got some arguments in favor of myself and why actually it was a good pick.

9:03Over five years, the stock is up over 1 ,000%. I think it was the best performing stock of the year last year. I just came in too late. And it's rallied a bit in the early days of the year too. It has. It's got a new AI chip coming out. There's all sorts of reasons to be very positive about it. 2024 is going to be, if we thought that AI was massive in 2023, it's just getting started for 2024. I just think everyone who is listening, your workplace is about to deluge you with AI, information, tools, ideas for the coming year. But there has been competition and it has been a bit hamstrung by not being able to make sales into China of its most sophisticated products.

9:42But yes, the rally up from the first half of the year was so strong that the momentum just didn't quite keep up. But it's not like it did badly. Not at all. Rob, your third best pick of 23 was Microsoft. This was your worst performer. And it too was up a pretty solid 10.2 % total return. Did fine. I mean, I expected you to do about this well. I guess I would say I didn't expect the others to do so well. I picked Microsoft because again, back in July, I was thinking economic slowdown. And Microsoft, because it's basically a business-to-business company right now, you know, sells very needed technology, equipment, software, I should say software to other businesses.

10:24It's a bit insulated from the fluctuations in the more sensitive consumer economy. That was my reasoning. I'm just glad, given that we had an economic boom, that, you know, that it did as well as it did. The challenge for that stock, you know, like for Apple, is that it's quite expensive now, a lot more expensive than it was five years ago, which makes it hard. But, you know, I'm pleased with a 10 % increase for Microsoft in this situation like this. It is interesting that the two, I'd say the two foremost AI stocks in this bunch of seven, NVIDIA and Microsoft, did all right compared to the bunch.

10:57But that didn't seem to be the main driver in the second half. It was priced in before we got to the contest in July, I think. The way that Microsoft handled the OpenAI drama was incredibly impressive and wasn't really appreciating the stock, but it could have been a reason for the stock to sell off and it wasn't. They avoided it. Incredible how. That's a very interesting comment. Because they stepped in so smartly. They apparently, so we report, were not made aware that Sam Allman was going to be removed by the board of OpenAI, despite being by far the biggest investor and putting billions of dollars in.

11:31And yet they stepped in very quickly. They made a public announcement supporting the company so that investors didn't feel frightened about the future of OpenAI. But they also, then they hired Sam Altman. Then they appear to have perhaps been instrumental in Sam Altman going back to OpenAI. They haven't taken a board seat, but they've made it very clear to anyone who's observing from the outside that there is a large and responsible investor managing what happens to this company. It was smooth and it was just very impressive. Yes. And very fast. The sound of gunshots was very muffled as though certain people got removed from the board.

12:06It was fine. Satya Nadella has an excellent silencer. Yes. Well, Elaine, your third best pick of 23 was Apple up 1.3%. This was the big disappointment in the bunch. Apple had a rough second half. And as we talked about on the last episode of Unhedged, a pretty tough start to 2024 as well. So sales hadn't been going well and were not expected to be up for the year. Maybe I had underestimated the scale of smartphone sales falling and sales in China. But I don't know. I have my defensive Apple locked and loaded. I don't know if you're ready for it. I wanted to pick this stock. You got this stock.

12:46I wanted to make competing. Yeah. Yeah. I would have taken it if you hadn't taken it. And I know why that is, Rob. And that's because we look at revenue, but we look at other numbers. Yes. Maybe with more attention. And that's why Apple is still a good stock. And that's because the volume of annual free cash flow is so enormous. So staggering. The buybacks and the dividends, it doesn't matter that sales have been in decline for the last few consecutive quarters because they will still be doing dividends and buybacks. And smartphone sales are expected to rise again this year. And the iPhone is just the dominating smartphone or rather fancy smartphone.

13:22If the government doesn't manage to break it up somehow or dislodge it somehow, this seems to me to be an incredibly defensive business. We're all locked in, you know, speaking of myself, my family, my friends, we're all locked into Apple world. We all buy services from Apple. Our lives rotate to a certain extent around this device. So even if it's not a growing business, it seems to me it's a very safe business to own between the steadiness of the demand and the free cash flow which you referred to. Yeah. I guess the one question is, is that that defensiveness and the way that you and your family are locked into the ecosystem is exactly what antitrust regulators hate about the company.

14:09They're coming for it. They're coming for it. And we'll see if it works or not, you know, and whether it's illegal or not, essentially. Yeah. Let's tally up the results then. So Rob, between Microsoft, Amazon, and Meta, which all put up double digit total returns in the second half, your average performance was 11.8%. Hooray. Elaine, your Google pick did well, NVIDIA picked it okay, and Apple kind of dragged you down a little bit, unfortunately. Your average was 7.1%. Now, both of you did outperform the Mag 7 average of 6.7 % because now that you picked Tesla. So that's at least a small consolation.

14:45But congratulations to Robert Valudis Armstrong for the victory. Elaine, what's going to happen next year? What is the fate of these? Give us a few quick headlines on what's going to happen to these seven stocks in 24. First of all, congratulations. I'm going to be magnanimous in my defeat. Very nice of you. The magnanimous seven. I'm going to be a total jerk in victory. I think that next year is going to be similar a bit to this year, but it's AI and regulation. And then what happens to the economy? They will be the three drivers. The wild card is maybe China and also the election. So depending on who gets in and what they might want to do with tax, with how they treat China, with supporting U.S.

15:27consumers, that could make a big difference. Although I will say Trump and Biden both seem to be almost identically hostile to trade with China. So there might not be a huge difference there. I mean, I'll be very interested to see if the economy isn't quite as strong next year. If we maybe get a taste of that recession we didn't get last year, things really slow down. Or indeed, if we get a stock market correction independent of the economy, how these stocks will perform then. We've seen how well these stocks can do in the good times. I'm curious whether they will outperform the rest of the market when the world or the market is under duress.

16:06I'm looking out for when we start to see numbers trickling in for revenue from AI products and whether those match expectations from Microsoft, from other companies, what happens to valuations then? I think there might be a little bit of a step back at that point. Well, Rob and Elaine, thank you for your picks. Congratulations, Rob, on the victory. We'll be back in a moment with Long Short.

16:38Welcome back. This is Long Short, that part of the show where we go longer thing we love, shorter thing we hate. As usual, two guest show, I'm going to butt out. Elaine, do you have a long or short? I'm going to short AI chatbots because I think there's already too many of them. I think they are going to go into hyperdrive this year. And I'm not sure what you need to chat to AI about generally in day-to-day life. I'm not sure that's going to be in the future what we end up using AI for, but I think it's what companies are trying to make us use AI for now. And it's very frustrating if you try and use it much.

17:09I don't know if you do. They are now everywhere. They're in social media. They're going to be part of your workplaces quite soon. They're not that useful. You're not excited for the meta Snoop Dogg chatbot? I mean, obviously that one, that's the exception, but the rest, no. All right, Rob, do you have a long or short? Well, speaking as a chatbot myself, I am going to go in a very modulated way, short the Magnificent Seven. I think 2024 could be the year in which the S &P 493 outperforms the Magnificent Seven. And this is based on no information whatsoever, except a lot of hype around the Magnificent Seven, a lot of very high valuations, and a solid belief in the fact that weird things happen.

18:01I don't think they're going to crash or anything like that. I just think the odds are slightly against them having another beat the market kind of year. The bar is certainly high for them to outperform the market again. Super high. And we're all so sure it's going to keep happening. This is what everyone said at the end of the pandemic. The odds are stocked heavily against them. If anything's up, they'll still be up. I just think they'll be up less than other stuff this year because they need to take a breather and things happen. Two falsifiable long shorts to return to and maybe this time Elaine's will be right and Rob's will be wrong.

18:36Almost certainly. All right, both. Thank you for being here. And listeners, we'll be back in your feed on Thursday with another episode of Unhedged. Catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Jacob Weisberg, and Jess Trulia. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.

19:14I'm Ethan Wu. Thanks for listening.

19:28We'll be right back.