Tech stocks - are the 'Magnificent 7' stocks worth investing in?

The grouping of major tech stocks, including Apple and Meta, delivered huge gains in 2023. But how should you approach investing in the sector in 2024?

Tech stocks symbolised by a mobile phone screen with 'AI' on it in front of a separate screen
Tech stocks boomed in 2023 - can they repeat the feat in 2024? (image: Getty Images)
(Image credit: Getty Images)

Tesla has suffered a shock fall in sales, with Elon Musk's EV outfit recording a 9% fall in deliveries in the first quarter of 2024 compared to the same period last year.

It marked the tech company's first year-on-year drop in quarterly sales for almost four years. Shares dipped 5% with the 2 April announcement, and now sit around 60% below their 2021 peak.

The news has come after three other landmark moments for the world's largest western tech firms. It also demonstrates a divergence in the performance of the major tech stocks.

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In early February, Meta celebrated its 20th birthday by paying out its first dividend to investors. The $0.50 a share payout came about after the tech giant significantly cut its headcount and, according to founder and CEO Mark Zuckerberg, “made a lot of progress” on AI. It now intends to make payouts on a quarterly basis.

A few weeks later, chip designer Nvidia unveiled record full-year results. The tech company’s stock price surged in the wake of the announcement, adding to the gains of 250% it had already enjoyed over the last 12 months. While most people hadn't heard of the company two years ago, it is now the third-biggest stock on the S&P 500, and the fourth biggest company in the world.

Both major developments came not long after another big anniversary - 10 years since the term ‘FANG’ was coined. Tech is now significantly more diverse than when Facebook (as it was), Amazon, Netflix and Alphabet/Google dominated investments in the sector.

For starters, this group of four has become seven - now known as the ‘Magnificent Seven’ (MAG7) stocks. And there are many other tech firms not included in this list that are enjoying strong share price gains - including Adobe, ARM and SAP.

The narratives around tech stocks remain somewhat similar to what they were when FANG was coined in 2013: high market valuations, huge growth potential (particularly when it comes to AI), but concerns about whether that growth can be sustained, as well as the potential regulatory barriers these companies face.

But what potential pitfalls await tech investors, if any?

Why are tech stocks proving attractive to investors?

Currently, tech is dominating portfolios, with funds like the L&G Global Technology Index, the Polar Capital Technology trust and stocks such as Nvidia and Tesla still popular in portfolios.

IG Group analysis of the S&P 500 shows that tech makes up 43% of the index, with the Mag7 driving 80% of its gains in 2023 thanks in large part to the buzz around AI. Indeed, the index topped 5,000 points for the first time in February largely as a result of tech’s strong showing.

The Nasdaq index, which has a 58% weighting to tech companies, also hit a new post-Covid high on 29 February. 

Big tech firms are also shifting the way they operate in a bid to maintain their growth. Take Meta as an example.

Fidelity International market commentator Graham Smith suggests its first dividend payout can be seen as something of a canny PR stunt. “At minimal cost, Meta is sending a subliminal message to shareholders that it’s going to be around for a while,” he says. “It’s also saying that investors can probably bank on some kind of return, even as its shares travel a rocky road, hopefully to even greater riches.”

It had a material impact too. Jason Hollands, managing director of investing platform Bestinvest, says he believes “the promise of a little income as well as the potential for growth” was a “major factor” in Meta’s stock climbing 20% in the immediate aftermath of its results announcement.

Mark Zuckerberg’s social media empire is also giving its investors greater confidence through its balance sheet, says John Moore, investment manager at RBC Brewin Dolphin.

“For many investors the change from Facebook to Meta and the wide distribution of capital to projects in 2020 and 2021 became concerning. It is almost easy to forget that the share price fell from $376 in September 2021 to $90 in November 2022. And it is only recently that the share price has hit new highs again,” he says.

“From late 2021 to now there has been a meaningful cost cutting and a streamlining project which has transformed the bottom line. It has also focused delivery on a few key - but highly influential - products offering white space growth potential. These are in addition to the tailwinds core offerings like Facebook, Instagram and WhatsApp have. In my opinion, the dividend payment from Meta is a milestone in that reboot and shows the company tangibly displaying its delivery of better cash outcomes.”

BYD cars awaiting export from China

Tesla is facing huge competition from Chinese EV manufacturer BYD (image: Getty Images)

(Image credit: Getty Images)

What are the potential pitfalls for tech stocks?

While Meta has had a good few weeks, the feel-good factor isn’t being felt by all in the tech world. Indeed, share performance is lagging at several Mag7 members as “the market is focusing on the individual prospects of each company, rather than treating them as a monolithic entity,” says Chris Beauchamp, Chief Market Analyst at IG Group.

Any challenges with earnings are quickly leading to share price dips, regardless of how prestigious the stock is. For example, issues in China have seen both Apple and Tesla take a hit. Alongside the concerns about the country’s economy, local competition has seen both firms lose out on revenue.

According to research by Enders Analysis, Apple’s China revenues fell 13% as a result of the resurgence of Huawei and emergence of Xiaomi and Samsung at the premium end of the market. Meanwhile, for the first time, Tesla was beaten by Chinese rival BYD to the top spot for the most globally shipped electric vehicle (EV) manufacturer in Q4 2023.

Enders Analysis says both are “incredibly exposed” to the country’s economic woes and increased domestic competition. Apple relies on China for 18% of its revenues, while for Tesla the figure is 23%.

Things aren’t necessarily peachy for tech firms in the West, either. Shares in Google’s parent company Alphabet are 6% down from the all-time high recorded at the end of January due to disappointing ad revenues. It remains to be seen whether the expected weak economic growth for 2024 (the UK is already in a recession) means these challenges continue.

Another ongoing threat to tech is regulation. There have been growing calls by Western governments, businesses and campaigners for tougher controls on AI. Negative publicity also continues to swamp the likes of Meta (online harms) and Amazon (worker’s rights). These issues may also be giving you pause if you’re considering investing in the sector.

But RBC Brewin Dolphin’s John Moore argues that these concerns are nothing new. “Tech is a changeable and highly fast paced industry,” he says. “The regulatory and legal framework has to catch up, often after changes have already come about. There is an element of backfill, catch up and adjustment until there is an accepted regime.

“Apart from the cloud of regulation, the main thing that would be a threat for the technology sector is a failure to deliver the earnings momentum that has set it apart from other sectors.”

Chris Beauchamp echoes Moore, and says that these sorts of issues should be seen as opportunities. “There will be challenges, but investors are too easily frightened into worrying about the downside case. For the longer-term, while these stocks will suffer pullbacks, these are likely to be buying opportunities.”

What do you need to think about if you’re investing in tech in 2024?

While you may well be weighing up the advantages and disadvantages of investing in tech, the chances are that your money’s already exposed to the sector in some way.

“Investors need to think carefully whether they are already taking enough of a bet on what is such a narrow cluster of companies before piling further cash in behind them,” says BestInvest’s Jason Hollands.

“What many private investors must remember, is that they could already be exposed to these companies, because of the increasingly extreme concentration amassed in many global and US funds to US mega-cap growth stocks.

“A passive S&P 500 index tracker will now be about 28.6% devoted to the Magnificent Seven because of their soaring market capitalisations, while even a global equities tracker following the broader MSCI World Index comprised of 1,480 companies will have around 19% exposure to these seven big beasts, which together are now valued at more than the entire Japanese, US and Canadian stock markets combined. Many actively managed global equity funds also have exposure to these ‘superstar stocks’ of the moment.”

If you are going to put more of your money behind tech, Hollands says those at the “adventurous” end of the spectrum could add a “satellite tech-focused fund to their core holdings” or plump for a Mag7-focused exchange traded fund. He adds that those with “average risk-tolerance” will probably already have their fill due to the “natural concentration” of portfolios around S&P 500 titans.

For Fidelity’s Graham Smith, it’s key to remember that tech investing can be a “nail-biting” experience over the short-term. “It’s easy to forget the Mag7 performed horribly in 2022. Moreover, it took until the final quarter of 2023 for them to press home an advantage,” he says.

“Such volatility can be turned to your advantage by investing in a tech-heavy fund via a regular savings plan. Volatile assets lend themselves to such schemes, because they automatically tend to increase the number of opportunities to buy more shares at low prices and fewer at high prices. Automation is the hallmark of regular saving, which avoids the pitfalls of trying to pre-empt short-term movements in markets and shares.”

Another option that can offer “smoother returns”, Smith says, is an “actively managed fund with an exposure to technology, but other stocks besides”. He argues: “Not only does that lessen the chance of being too wedded to one sector when sentiment turns against it, it means you are invested in a fund that can dynamically adjust its tech exposure up or down as conditions change.”

Alongside your portfolio’s set up, another thing to think about in 2024 is how to approach the likely new kids on the block. Brands, such as Klarna, Reddit and Discord, are expected to launch IPOs this year. While these always generate a buzz, IG Group’s Chris Beauchamp warns prospective investors to not lose sight of the bigger picture. “Investors should beware the attraction of jumping on the hype around these minnows when the real action - and cash generation - is in the big names,” he says.

Ultimately, keeping your portfolio diversified, both in terms of geography and sector, can protect you against sudden shifts in sentiment, macroeconomic shocks, regulatory environment and geo-political disturbances.

And with real concern over the stability of the Middle East and China’s economic struggles, as well as the ongoing war in Ukraine, stock diversification could help to provide you with more certainty in an uncertain world. 

Henry Sandercock
Staff Writer

Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV. 

Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years. 

After moving to - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.