• 2024-07-10

NYU Finance Professor: Buy the Dips

In a recent media interview, renowned finance professor Aswath Damodaran from New York University’s Stern School of Business shared his insights on investing in U.S. technology stocks, particularly during periods of market correction. He highlighted the so-called "Magnificent Seven," a term encompassing seven major tech giants including Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, suggesting that these companies represent a golden opportunity for investors even amidst fluctuating stock prices.

Professor Damodaran, known globally for his work in expanding the financial market valuation system, emphasized the robust profitability of these tech giants. He referred to them as “cash flow machines” and argued that the fundamental financial health of these companies remains exceptionally strong. His belief is that growth trends for these tech titans will endure, making them attractive targets for investment during market dips. He urged investors to consider seizing the opportunity to acquire shares of these companies during market corrections, suggesting that acquiring shares of one or two of these leading firms could be particularly beneficial since they significantly drive both the U.S. economy and the overall momentum of the stock market.

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The Magnificent Seven hold substantial weight in major stock indices such as the S&P 500 and Nasdaq 100. Their significance is underscored by their pivotal role in propelling the S&P 500 to reach record heights. Over recent years, these tech giants have been at the forefront of a global tech investment boom, leading a frenzy of investment into artificial intelligence (AI) technologies that has continued into 2023. With Nvidia, Apple, and Google at the helm of this movement, the immense scale of their market operations and financial capabilities positions them ideally to capitalize on the explosive growth of AI.

Since the beginning of 2023, these companies have clearly been the driving force behind the U.S. stock market's bullish trend. Their unparalleled revenue generation powered by AI, coupled with solid fundamentals, robust cash flows, and increasing stock buybacks, has attracted an influx of global capital. Professor Damodaran and Wall Street analysts alike suggest that these companies will likely continue to lead the S&P 500 to new heights by 2025, driven by persistent strong earnings growth and the resilience of the U.S. economy. Barclays recently forecasted an impressive 10% rise in the S&P 500 index next year, projecting it to hit 6,600 points due to this growth trajectory. Similarly, UBS anticipates that the tech sector, represented by the Magnificent Seven, will outperform the broader U.S. market next year, with projections suggesting the index could reach 7,000 points by 2025.

Quantitatively, a Bloomberg index designed to track the performance of this elite group saw its value double in 2023 and has surged approximately 60% in the current year alone. This indicates that investors who have maintained a steadfast hold on these tech stocks since 2023 have already seen their returns double, enjoying potential gains of around 60% this year.

However, the stock price of Tesla, led by Elon Musk, has faced significant downward pressure for much of 2023. At one point, some analysts on Wall Street even sought to exclude it from the Magnificent Seven. Yet, a remarkable turnaround occurred in November, where Tesla emerged as the strongest performer among the tech giants. This resurgence has played a crucial role in propelling both the S&P 500 and Nasdaq 100 to new peaks.

The recent uptick in Tesla’s stock price can largely be attributed to a wave of investor optimism. This optimism is tied to expectations that Musk's companies will undergo considerable positive changes, particularly regarding the expedited approval processes from the federal government for Tesla’s Full Self-Driving (FSD) technology and Robotaxi services. Since November, Tesla’s shares have skyrocketed over 40%. Notably, Musk had previously provided funding and served as an advisor to a candidate who has since claimed the presidency.

For bullish investors and Musk's loyal supporters, the announcement of Musk's leadership in the U.S. Government Efficiency Department has potentially transformative implications for Tesla and related endeavors in AI and autonomous vehicles. Investors believe this could lead to a significant acceleration in the regulatory review of Tesla’s FSD and Robotaxi. The traditional narrative surrounding Tesla’s challenges related to “federal inefficiency” and slow-moving regulations may soon experience a much-needed overhaul.

One of Wall Street's leading investment firms, Wedbush Securities, which has a history of enthusiastically backing Tesla, has raised its price target for Tesla shares from $300 to an ambitious $400 in the next 12 months. This adjustment reflects Wall Street's confidence in the company's pivot towards navigating future regulatory landscapes more effectively, particularly as the government seems poised to accelerate approval processes that would undoubtedly benefit Tesla’s innovative projects. The overarching sentiment remains strong; investors, buoyed by Damodaran's analysis and other expert forecasts, are reassured that the Magnificent Seven will continue to deliver impressive returns and contribute substantially to the ongoing bull market in U.S. equities.

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