In case you haven't noticed, the bulls are very much in control on Wall Street. The mature stock-driven Dow Jones Industrial Average, benchmark S&P 500, and growth-propelled Nasdaq Composite, have all soared to multiple record-closing highs in 2024.
Although broader themes, such as the artificial intelligence (AI) revolution, stock-split euphoria, and better-than-expected corporate earnings, have fueled this rally, the foundation of this two-year (and counting) bull market was laid by the "Magnificent Seven."
The Magnificent Seven represent some of Wall Street's largest and most-influential publicly traded companies, including:
Apple(NASDAQ: AAPL)
Nvidia(NASDAQ: NVDA)
Microsoft(NASDAQ: MSFT)
Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG)
Amazon(NASDAQ: AMZN)
Meta Platforms(NASDAQ: META)
Tesla(NASDAQ: TSLA)
These are businesses that, for the most part, possess impenetrable moats. For instance, Alphabet's Google has accounted for at least a 90% monthly share of global search dating back more than nine years. Meanwhile, Apple's iPhone is the leader in domestic smartphone market share, Amazon Web Services is the world's top cloud infrastructure service platform, and Meta Platforms lures more daily active users to its sites than any other social media company.
Image source: Getty Images.
Despite these competitive edges, Wall Street has mixed views on where some of the Magnificent Seven members are headed next. Based on price target from two Wall Street pundits, the following Magnificent Seven stocks can plunge by up to 98%!
Nvidia: Implied downside of up to 98%
The first Magnificent Seven constituent that at least one respected Wall Street pundit sees losing a majority of its value is AI kingpin Nvidia.
In an interview with Fox News Digital in May, economist and financial author Harry Dent pointed to Wall Street being in the "bubble of all bubbles," which he expected would result in the market bottoming out in 2025. "I think we're going to see the S&P go down 86% from the top, and the Nasdaq 92%. A hero stock like Nvidia, as good as it is, and it is a great company, [goes] down 98%. Boy this is over," per Dent.
While Dent's forecast of a 98% decline completely overlooks Nvidia's cash flow and the successful operating segments it had in place long before AI became a driving force on Wall Street -- e.g., graphics processing units (GPUs) for gaming and cryptocurrency mining, along with virtualization software -- I do believe he recognizes the potential bubble Nvidia's stock may be in.
As a perfect example, we haven't witnessed a next-big-thing technology, innovation, or trend, avoid a bubble-bursting event early in its expansion in at least 30 years. Including the advent of the internet, investors have consistently overestimated the uptake and mainstream adoption of purportedly game-changing innovations for decades. Thus far, nothing suggests artificial intelligence is going to be the exception to this unwritten rule.
Beyond history being a problem, Nvidia is set to face a meaningful uptick in competition on all fronts. While most investors are focused on external competition, such as Advanced Micro Devices bringing AI-GPUs to market, the real threat may come from within.
Mag-7 members Microsoft, Meta Platforms, Amazon, and Alphabet, are Nvidia's four-largest customers by net sales. All four of these respective industry leaders are internally developing AI-GPUs to use in their data centers. Even if Nvidia's chips remain superior in terms of computing, the cost and accessibility advantages from these internally developed chips should eventually strip Nvidia of valuable data center real estate.
It would also be wise not to overlook the role U.S. regulators have played in capping Nvidia's potential. In 2022 and 2023, regulators restricted Nvidia's ability to export its AI-GPUs to China, the world's No. 2 economy by gross domestic product. This is a big problem given that China has consistently provided Nvidia with billions of dollars in annual sales.
While I don't foresee Nvidia approaching a figure that's anywhere close to Harry Dent's forecast of a 98% peak-to-trough decline, I do believe AI needs to mature as a technology, which will lead to significant downside in Nvidia's stock.
Image source: Tesla.
Tesla: Implied downside of up to 90%
The other Magnificent Seven component that can collapse, based on the prognostication of a lone Wall Street analyst, is electric-vehicle (EV) manufacturer Tesla(NASDAQ: TSLA).
Last week, Tesla's stock surged following the release of its third-quarter operating results. Specifically, optimists focused on an uptick in gross margin, decisive year-over-year growth in the company's energy segment, and a more-than-tripling in year-over-year free cash flow (FCF) to $2.74 billion. In spite of this and previous operating reports, GLJ Research founder and longtime Tesla bear Gordon Johnson has a very specific price target of $24.86 per share, which would imply 90% downside.
In a number of previous interviews with CNBC, Johnson has focused on Tesla's recent earnings decline, called into question the safety of its vehicles, and cautioned of growing competition in the EV space, as reasons to believe Tesla's stock could head to the mid-$20s. While I, once again, don't believe this extreme downside target will be achieved, there are ample reasons to believe Tesla can lose half or more of its value in the quarters/years to come.
Increasing competition in a highly cyclical industry is an obvious concern. CEO Elon Musk has previously noted that his company's pricing strategy is dictated by demand. Yet even with Tesla slashing the selling price for Model's 3, S, X, and Y on more than a half-dozen occasions since the start of 2023, the company's inventory level continues to climb on a year-over-year basis. This suggests Tesla has a clear demand problem.
Another issue with Tesla is the quality of its income. On a year-to-date basis, 51.3% of its pre-tax income can be traced to automotive regulatory credits and interest income on its cash. These are two unsustainable income categories that have nothing to do with the heart of its business.
To add fuel to the fire, Tesla's $2.74 billion in FCF grew because of some perfectly legal, albeit easy-to-spot, accounting tactics. A notable increase in accounts payable and accrued liabilities explains a good portion of this recent FCF increase. This is to say that Tesla's EV operations aren't driving what would appear to be improved operating results.
Although Elon Musk has played a big role in Tesla's ascension, he may be just as culpable in sending shares of his company meaningfully lower. The overwhelming majority of Musk's promises have failed to come true. The problem is that many of these innovations/promises are built into Tesla's valuation. If these failed visions (e.g., Musk has been promising Level 5 full self-driving every year for a decade) are backed out of the company's valuation, much of its market cap would evaporate.
Tesla's valuation is the cherry on the sundae for pessimists. While some investors prefer to think of Tesla as a "tech stock," its auto business is overwhelmingly vital to its success, sales, and profits. Auto stocks typically trade at a single-digit price-to-earnings (P/E) ratio, and not north of 80 times forward-year earnings, like Tesla.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
