Here’s why the Magnificent 7 stocks have crashed and erased $2.3 trillion

Magnificent 7 stocks have retreated sharply this year and erased over $2.3 trillion in value. The closely-watched Roundhill Magnificent 7 ETF (MAGS) dropped to $60.80 from the year-to-date high of $71.17. 

Most companies in the group have dived in the past few months. Nvidia, the world's largest company, has dropped by nearly 20% from its year-to-date high.

Similarly, Microsoft stock has dived by 33%, while Meta Platforms, Amazon, and Tesla have fallen by 30%, 14%, and 16%, respectively from their highest levels this year. Apple has also dropped modestly from its year-to-date high, down from $317 to $280 today.

Profit-taking and rotation to memory companies

One possible reason behind the ongoing Magnificent 7 stocks retreat is that investors are taking profit after their surge. At its peak this year, Apple was up by over 150% from its lowest level in 2023. Nvidia was up by 43% from the lowest level last year. 

Most notably, these stocks are retreating because of the sector rotation towards companies in the memory industry. A closer look at data shows that memory companies are among the top gainers this year. This includes companies like Micron, Sandisk, Western Digital, and Seagate. Most recently, the Roundhill Memory ETF (DRAM) has accumulated over $24 billion in assets since its launch in April.

The companies have done well amid the ongoing supply shortage that has pushed their prices to the highest level on record. As a result, hyperscalers, who are their biggest clients, are having to spend billions of dollars more. 

For example, the top hyperscalers are planning to spend over $750 billion in capital expenditures this year, much higher than what they spent last year. This surge is driven by both new data center launches and soaring memory prices.

Just last week, Apple made headlines last week when it said that it would hike prices of its MacBooks because of higher prices. It is also considering hiking iPhone prices. 

ROI on data center spending

Some Magnificent 7 stocks are also falling amid fears of return on investment (RoI) as they boost their data center spending. The most affected companies in this are the top hyperscalers like Microsoft, Meta, and Google.

At the same time, they have now started raising capital in highly dilutive ways to fund their ambitions. For example, Google recently raised over $80 billion in a combination of debt and equity, diluting its shareholders. 

Meta Platforms is considering such a move, while Nvidia recently raised over $25 billion in debt. Tesla has already warned that it will not generate positive cash flows this year because of its Terafab 

Therefore, some analysts are worried about whether they will achieve the return on investment any time soon. 

Still, on the positive side, these companies have now become bargains. For example, data shows that Nvidia is trading at a forward price-to-earnings (PE) multiple of 22, slightly lower than the S&P 500 Index’s 23. Meta Platform’s forward PE ratio has dropped to 16, while Google’s multiple has fallen to 23. 

Therefore, since these are some of the most profitable companies in the world, there is a likelihood that investors will rotate to these companies, potentially after the next earnings season.