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What Is A Mega Stock?

A mega cap stock is defined as a company with a market capitalization, or the value of its outstanding shares, above $200 billion but in this article, the mega stock label is limited to just those 7 stocks - The Magnificent Seven - with market capitalizations in excess of $700B. They are generally referred to as technology companies but only three — Apple, Microsoft, and NVIDIA — are classified in the Technology sector of the S&P 500 by Standard and Poor’s while Amazon and Tesla are classified as Consumer Discretionary and Alphabet and Meta Platforms as Communication Services and this allows for some diversification in the mega-size category.

Each of the stocks in munKNEE's new "The Magnificent Seven" AI-themed Mega-Cap Stocks Index is described below as to its relationship to AI within its business operation along with its current market capitalization, stock performance since its peak in July and its YTD stock price appreciation (as of the end of September), ranked in descending order, and its valuation metrics consisting of its forward Price-to-Earnings (PE) Ratio***, Price-to-Sales Ratio (PSR)*, Price-to-Earnings Growth (PEG) Ratio** and expected earnings increase over the next 12 months. Please note that the metrics below change daily as their stock prices do so this article will be updated weekly going forward to provide timely information.

"The Magnificent Seven" AI-themed Mega-Cap Stocks Index

1. NVIDIA Corporation (NVDA): DOWN 6.9% since July; UP 197.7% YTD
   • designs the best-in-class graphics card for AI, machine learning processing
   • Market Capitalization: $1.1T;
   • Forward Price-to-Earnings (PE) Ratio: 40.7;
   • Price-to-Sales Ratio (PSR): 20.3;
   • Expected earnings increase over the next 12 months: 59.3%;
   • Price-to-Earnings Growth (PEG) Ratio: 1.2
   • Read:
     • AI fever and elevated demand raise the bar for Nvidia margin expectations
     • 2 Best Chip Stocks to Buy on Soaring AI Demand
2. Meta Platforms (META): DOWN 12.5% since July; UP 149.5% YTD
   • large consumer data sets, AI uses through suite of consumer products
   • Market Capitalization: $786B;
   • Forward Price-to-Earnings (PE) Ratio: 22.9;
   • Price-to-Sales Ratio (PSR): 5.9;
   • Expected earnings increase over the next 12 months: 12.9%;
   • Price-to-Earnings Growth (PEG) Ratio: 1.0
   • Read:
     • Barclays Analysts See Meta as Well-Positioned for Growth in AI
     • Meta starts rolling out generative AI tools for all advertisers
3. Tesla Inc. (TSLA): DOWN 6.4% since July; UP 95.3% YTD
   • self-driving software
   • Market Capitalization: $829B;
   • Forward Price-to-Earnings (PE) Ratio: 77.0;
   • Price-to-Sales Ratio (PSR): 8.3;
   • Expected earnings increase over the next 12 months: 23.0%;
   • Price-to-Earnings Growth (PEG) Ratio: 3.2
   •  Read:
     • Top Stock in Cathie Wood's Portfolio With Serious AI Upside
     • Tesla's $300 Million AI Cluster Is Going Live Today
     • Missed Out on Nvidia? 2 AI Stocks to Buy Now
4. Amazon.com Inc. (AMZN): DOWN 12.8% since July; UP 31.8% YTD
   • cloud service provider, implementing AI across suite of consumer products (retail)
   • Market Capitalization: $1.3T;
   • Forward Price-to-Earnings (PE) Ratio: 57.9;
   • Price-to-Sales Ratio (PSR): 2.3;
   • Expected earnings increase over the next 12 months: 11.8%;
   • Price-to-Earnings Growth (PEG) Ratio: 1.5
   • Read:
     • Of All the AI Stocks, These 2 Impressed Me the Most This Earnings Season
     • How AI Is Revitalizing Amazon's AWS Business: A Closer Look
5. Alphabet Inc. (GOOGL): DOWN 30.0% since July; UP 48.3% YTD
   • cloud service provider, implementing AI across suite of consumer products (G-Suite, Bard)
   • Market Capitalization: $1.7T;
   • Forward Price-to-Earnings (PE) Ratio: 24.0;
   • Price-to-Sales Ratio (PSR): 5.6;
   • Expected earnings increase over the next 12 months: 10.5%;
   • Price-to-Earnings Growth (PEG) Ratio: 1.4
   • Read:
     • Google's patent may save some power on AI development; 
     • Alphabet Focuses on Efficiency with New AI Chip
     • Google unveils new AI products at 2023 Cloud Next event
6. Apple Inc. (AAPL): DOWN 12.8% since July; UP 31.8% YTD
   • large technology platform, integrates AI through products
   • Market Capitalization: $2.7T;
   • Forward Price-to-Earnings (PE) Ratio: 28.6;
   • Price-to-Sales Ratio (PSR): 7.1;
   • Expected earnings increase over the next 12 months: 6.0%;
   • Price-to-Earnings Growth (PEG) Ratio: 2.7
   • Read:
     • Apple shares get rare downgrade
     • Apple CEO Tim Cook just sold 13% of his stock for $42 million after taxes
7. Microsoft Corporation (MSFT): DOWN 6.0% since July; UP 31.7% YTD
   • cloud service provider, implementing AI across suite of consumer products (Office Suite, OpenAI)
   • Market Capitalization: $2.4T;
   • Forward Price-to-Earnings (PE) Ratio: 29.0;
   • Price-to-Sales Ratio (PSR): 10.1;
   • Expected earnings increase over the next 12 months: 11.9%;
   • Price-to-Earnings Growth (PEG) Ratio: 2.3
   • Read:
     • Microsoft straps AI to your back
     • A Bull Market Is Coming: 2 AI Growth Stocks That Brilliant Money Manager Ken Griffin Is Buying Hand Over Fist
     • Prediction: These Will Be the 3 Biggest AI Stocks in 2030

Summary

• Average YTD Price Performance: UP 81.7%;
• Average Price Change from July: DOWN 5.9%; 
• Average Market Cap: $1.5T;
• Average forward PSR: 26.4;
• Average PSR: 5.5;
• Average PEG Ratio: 1.3; and 
• Average earnings increase expected over the next 12 months: 22%.

AI's contribution to the revenue of each of the above companies is not a reality in 2023 but, that being said, however, recent and on-going, developments in AI have created extremely high expectations for these companies moving forward.

According to a research note from analysts at Goldman Sachs,  the average Magnificent Seven mega-cap stock is currently trading at a 1.3x PEG ratio - a valuation metric that adjusts for future earnings expectations - compared with 1.9x for the median S&P 500 stock and, as such, is now cheaper relative to the S&P 500 than at any point in the past six years.

The Magnificent Seven mega-cap stocks are poised to outperform in the fourth quarter:

• based on earnings expected to increase by 22% over the next 12 months (half that if Nvidia is excluded from the calculation), according to GS,
• and especially so if yields pull back from current 16-year highs as growing tech stocks tend to perform well during periods of falling interest rates because they tend to borrow heavily in order to finance their rapid expansion, and lower interest rates reduce the cost of taking on and servicing debt.

5 AI Category Comparisons

This article is the fifth in a series of articles on the performance of various AI categories. They all have been written exclusively for TalkMarkets and are as follows with their YTD stock performances:

1.  Only These 4 AI Stocks Are Considered Undervalued (165.9%);
2. Micro/Small Cap AI Stocks Are Up More Than Twice Any Other AI Category YTD (142.0% YTD);
3. The AI-themed Magnificent 7 Mega Cap Stocks Are Up 81.7% YTD
4. Latest AI Quantum Computing News And Company Stock Performances YTD (67.5% YTD);
5. Latest AI Chatbot Development News And Company Stock Performances YTD (54.4% YTD)

In comparison, the Global X Artificial Intelligence & Technology ETF (AIQ) of 87 sector stocks is only UP 37.4% YTD.

Conclusion

To take full advantage of what the future might well hold for mega-cap AI-themed companies consider investing in one or more of the stocks highlighted in this article. Naturally, it is imperative that you do your own due diligence before making a decision to do so as my comments are not recommendations, per se. I hope this article has made you aware of the opportunities.

Definitions

• Definitions:
  • *The price-to-sales ratio (PSR) describes how much someone must pay to buy one share of a company relative to how much that share generates in revenue for the company. and, as such, determines whether its stock is cheap or overpriced in comparison to its peers. While the ideal ratio depends on the company and industry, the ratio is typically good when the value falls between one (1)  and two (2) and a ratio of less than one (1) is even better. According to FullRatio (see here), it is 2.18 for information technology services stocks.
  • **The price earnings-to-growth ratio (PEG ratio) is considered to be an indicator of a stock's true value. A PEG lower than 1.0 is best, suggesting that a company is relatively undervalued.
  • ***The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share. An excellent forward PE ratio is between 10-25 for major stocks since stocks with a forward PE below 10 can often be a value trap. On the other hand, those above 25 can be too expensive as they are priced with irrationally high growth anticipations.

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