Seven stocks are powering the market: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. How will they do in the second half of this year? Ethan Wu hosts as Rob ‘Value This’ Armstrong takes on Elaine ‘The Lex Flex’ Moore. In three rounds they pick their winners for the second half of 2023, and tell us why they chose them. If you enjoyed this preview of the new podcast Unhedged, subscribe to the show now: https://apple.co/478A3VS
Pushkin.
Hey, it's Jacob. We'll be back next week with a new episode of What's Your Problem. But in the meantime, I wanted to share another show I've been working on. It's called Unheedged and it's hosted by Ethan wo a brilliant, funny economics reporter at the Financial Times. The show comes out twice a week and it's basically Ethan and his colleagues at the FT explaining what's happening in finance and markets. I could go on about the show, or I could just play you a recent episode. So here is a recent episode.
I hope you like it. They are sexy, they are salubrious, they are magnificent. They are the seven tech stocks propping up the S and P five hundred. But which are the sexiest the most salubriums. Today on the show, we have two contestants duke it out and a draft style game for the most magnificent tech stocks at the top of the market. This is on Hedge, the Markets and financihow from the Financial Times and Pushkin. I am reporter Ethan Woo, your host today for this tech stock rumble. In one corner, we have rob Value, this armstrong I'm here to win, Nathan, when are you not? And in the other corner we have Elaine putting the flex back into Lex more.
Hi, I'm gonna love about the mess.
You're also here to win. You're on, I'm here to beat Rob.
That's the most important.
That that is the most important. Elaine is the deputy head of lex and our resident tech stock expert. And today, Elaine and Rob, you're both going to pick three of your favorites out of the seven tech stocks in a draft style competition, and there will be one left over. The criteria for your decision making is from today July thirteenth, twenty twenty three, to the end of the year December thirty First, which stock will have the best price appreciation in the market. That's your metch And since first pick is very important, we're gonna have a little trivia question a little over under to decide who gets that first pick. But first, what are our seven stocks?
Rob Our seven stocks are Alphabet, Meta, Apple, Microsoft, Amazon, in Vidia, and Tesla.
Of these, I think pretty much inarguably the stock doujors in Vidia. I mean, it's just had a preposterous run up in both valuation and its stock price, so today for the privilege of getting first pick. In the second quarter of twenty twenty two, in Vidia earned fifty one cents per share. What is the bottom up analyst estimate for the second quarter of twenty twenty three. I'm giving you two dollars, Elane, do you take over or under on two dollars? Over over robi? Okay, take the under. Okay. In Vidia's analyst estimate for the second quarter of twenty twenty three is two dollars and six cents a share, just over two dollars. It's pretty much quintupled in the space of a year. So I'm sorry, Rob Elaine's going to get the first.
Pick today after a flying start.
Okay, Ellen, which of the magnificent seven are you starting with?
And why I'm going from video? I'm starting strong.
There you go.
I know the haters will say that competition is coming and video work keepers advantage forever, but I can't think of a meeting I've been to this year that hasn't included AI in there somewhere. And then Vidia is completely out on its own in providing semiconductors in this market. So Jensen Twang noted star like on cool leather jacket is leading the way, and there's no Intel. There's nobody else you can compare to Nvidia right now. So even if we've had the stock rock it up this year, he was handing out hints about what the second half of the year might be, but without giving any numbers. And I have a feeling that when we get the next set of earnings, we'll hear some numbers, and I think the stock is just going to bounce up even further.
Elaine, that's it's very interesting that you pick in video first, because I have before me my secret draft order list, and I put Nvidia last. Not only did I put it last, I put it last for the exact same reasons that you put it first. We are at peak AI hype. The stock trades at sixty times earnings as of a few days ago. Anyway, it had over almost two hundred percent price return for the year.
This is a.
Great stock that is at the absolute top of investor excitement. So they only need to step on a very small banana peel to fall directly on their faces.
Yeah, and given this as a second half bet decent chance of a reversal, you might have to think, no way, no way I mean I should say that.
I say this as a person who got into finance working as a for a value investment shop and looking for stocks that are cheap and underappreciated. So partly you see my biases talking here, and for the last ten years having a value orientation has worked exactly zero times. Yeah for me. So history is on a lane side. Yeah, ill, and you might be a good shape.
I agree that we're in the midst of AI height. What I don't agree with is the idea that that's peaked. There are so many companies that are still trying to figure out their AI strategy. What they all want is compute power. They don't really understand how they're going to price or what kind of AI services they're going to use or sell. But what they all want is the ability to have some kind of AI that they can tell investors that they are including in their company. And if you want that, then you have to have in videos services. And because it's the only one that has the chips that will do this, there is no competition right now. I agree with you on the valuation and if you look for a cheap stock, of course, and videos not that. But I think if We're just talking about the second half of this year, and video is just going to keep on going up. What stands in it's way? What is the banan appeal that could come along?
That's the thing about banana peals. You don't see them, You don't see them going, and don't see them till you step on them.
Okay, Rob Eleen's done you a great favor of taking your bottom pick off the table table. What's your first pick?
Uh, I'm taking Microsoft, and I'll tell you why.
Now.
This pick would have been very easy to make before yesterday's inflation numbers, because I was pretty much in the recession camp for you know that the economy would slow a lot towards the end of the year, and I was thinking, you're gonna want Microsoft because it has business customers. In a slow down, the business customer will keep buying Microsoft's stuff. Also, reasonable valuation expectations are not very high. Earnings growth for this year is expected to come in like mid single digits. It hasn't run up as much as some of these It's up forty percent this year, which is a lot less than some of the others. I just have this feeling that's solid old Microsoft in a group of stocks that has had a great first half of the year, with the possibility of some choppy weather coming in the second half of the year, Microsoft might come out ahead.
I don't.
I'm not terribly optimistic about the stocks in general for the second half of the year. So like, if they're all do so, so, I think Microsoft will do the best.
Yeah so so, yeah, I know we've seen its cloud computing business be kind of the source of resiliency as other tech companies are struggling. Yeah, all right, that's round one. Elaine's chosen Nvidia and Rob's chosen Microsoft. Elaine Round two. Five left, what's your next pick? She's taking Tesla.
Now, no, I'm gonna I'm going to take Apple. And it is very much not because of the mad expensive three thousand, five hundred dollars mixed reality headsets that they announced, but then that they're not even going to start selling until next year. What matters for Apple is that it is still the lead in smartphone markets. Smartphone market hasn't been amazing, but because Apple is still very much the king of that market and it keeps on selling these high margins services, the company is throwing off so much cash it can afford to experiment free cash flow five times sides of metals, while Meta is just draining its budget into the metaverse. Apple has so much more, had a one hundred and sixty six billion of cash marketable securities, keep saying it's going to keep handing it out. If you were looking at Baluy stocks, it's not the best. It's not some kind of hidden gem, but I think that it's solid.
But elater. Are we at peak smartphone saturation?
We keep on thinking we're at peak smartphone saturation. Didn't we think that about three or four years ago ago? For me, Yeah, someone comes out with an incredibly expensive new version or a version that's half the price and has half the power, and everybody buys it. Also, if you keep on producing phones that smash, that keep running slow after a year, then I guess there is no such thing as satuation.
I shudder to agree, but I agree. This was my second pick.
Grudging consent.
I no.
I think, first of all, Apple's an amazing company for a million reasons that I could talk about. I don't think the stock is terribly expensive relative to the other ones. And I also like it because it is not only the smartphone leader. It is the high end smartphone leader, and if there is anything we've learned over the last couple of years, the high end has been a sweet spot for the market. Marketing to the richer end of the economy has just plain worked. Expectations for this year are low, too, agreed. Yeah, people think they're going to have a year hard time lapping the excellent year they had last year. A lot of room for this company to surprise to the upside. Maybe I should have taken Apple first.
The thing is, if there's no growth anywhere, then it doesn't matter so much that smartphone sales aren't rocketing, because the comparison against other tech socks is not about growth profitability, and it's about how much cash you're sitting on.
Well, what's your next pick?
We're the meaty middle, the meady middle, and the hard part of the draft. I am stuck between two names here, and I really, I honestly don't know which way to go. But because I picked steady Microsoft as the first pick, a pick designed to help in a weakening economic environment, I'm going to take Amazon next. Now this goes against my value. Investors in general hate Amazon, but what I like about Amazon is that the stock hasn't gone up very much over five years. It's gone up a lot this year, but it's been parked where it is. If the consumer is strong for the rest of the year. They just reported they had like their first day of Prime Day was the biggest still ever. So the concern with the stock, why it's been parked for a couple of years now is because people feel like the retail business is not that strong. Maybe it surprises to the upside. AWS continues to be a great business, and maybe the fact that the stock has gone nowhere in five years lights of fire under the management. Maybe they start turning the profit dial a little bit, which is something that they've always had the ability to do earn more money than they earn, but they've always put the money back into the business instead. Maybe they start shifting that mix to get the stock moving.
Amazon Amazon second pick for you. Surprising to me. I thought this was going to be one of the underdogs coming into this. It should be yeah, yeah, yeah.
They spent seven billion dollars on shows for their streaming service.
Yes, and they were all right, and they were all.
Yeah, the streaming business, it's a problem. The structure of the streaming business is the reason Netflix isn't one of the big tig stocks anymore. Right, And you have put your finger on the hardest bit. And that is evidence of what I talked about their incredible appetite for investment over time. Investors seem finally to have become a bit wary about that. They ate it up for twenty years, and now they're kind of looking at this thing and saying it's not the world of two thousand and five anymore.
Yeap, all right, that was round two. Elaine's chosen Apple and Rob's chosen Amazon. Elaine, what do you got for round three? We've got Meta, Tesla and Google left.
I wouldn't touch Meta.
They've got Threads. Come on, now, I.
Do quite love Threads, but they've done so much cost cutting is any so far they can go? So I think that's kind of it for Meta. I'll go Alphabet, which is a weird one in a way because it's investing a lot in AI, and yet AI could kind of eliminate their central search business. But Microsoft being hasn't taken over from Google Search. I don't know anybody that goes straight to when they're looking something up online. Valuation multiples are fairly low. There's really low debt to equity ratio. That digital advertising market seems to be doing a lot better or was definitely doing a lot better in the last quarter than it was towards the end of last year. It's not my favorite of all the tech stocks, but it would be definitely my pickover Tesla and Metal.
Yeah. Well, Elaine, am I right to detect attention in kind of your in Vidia pick and your Alphabet pick. You're betting their AI hypees not over. It's going up up into the right, but it's not going to cannibalize Alphabet's core business.
I mean, Alphabet is kind of trying to callibalize its own business. That's quite strange. I guess my feeling about AI is that it's the classic You want to back the stock that's selling the tools. So it doesn't really matter what happens to AI next year or whether this all turns out to have been over overhyped. If there's investment going on right now, you want to be backing the company that's selling the compute power, and that's Nvidia.
Yeah. Yeah, So William's picked in Nvidia, Apple and Alphabet. Rob has Microsoft, Amazon, and he is now going to settle the cage match between Mark Zuckerberg and Elon Musk by picking Meta or Tesla.
I'm taking Meta, and I'm taking Meta because I'm not taking Tesla. Okay, As a value guy, I can't touch a stock that is up one hundred and twenty three percent this year, even while estimates of its earnings this year have fallen. So all the work of getting that stock up and more has been done by its valuation, not by its performance. I hear the cars are great. I think Tesla might win the What are the ultimate fighting they're doing? Are they doing jiu jitsu.
Of zuckabug his mma trying?
Now he's like all skinny, like the big fat Zuck.
No, Zuck's ripped. Have you seen it? No?
No, no, no, I'm saying Zuck like the person who is physically larger just wins, right. And my impression is that whatever the appearance of their body, musk is bigger.
Have you seen musk not musk suck shirtless recently? Yes, it's impressive. Each Muscles don't win fights, that is what I'm saying. And did promise to sit on Zuck in a fight.
Between two people who are not fighters. Just pick the bigger one.
That's the rule.
But for the stock, for the star now, Meta has had an incredible run, and a lot of that is to do with them saying we won't be quite as stupid as we were before. That's put the stock up one hundred and fifty percent or something.
This year.
They downplayed the stupid metaverse and they have, you know, promised to focus on efficiency as you referred to earlier online. I think your concern is exactly right. Where do they go from here? It seems like all the good stuff they can do is now priced in the stock. However, it's trading at a kind of market multiple. It costs you the same thing as the S and P five hundred. It's a very profitable company. I think you know they're okay, sixth pickout of seven.
Yeah, but how do you downplay the metaverse when you've called your company Meta and you've spent thirty seven billion dollars minimum on it. You have to keep spending on it, You have to keep pushing forward unless you change your name back to Facebook.
The fact is Facebook is sitting there with seventeen kajillion users worldwide looking at its products, it has Instagram, and the fact that the founder lives in a complete fantasy world probably doesn't matter all that much.
Elane, do you do you have a higher estimation of Tesla that meta?
Yes, that's not saying much.
Is it semore? Same work?
Well, the cars are good, the charging network is expanding. That's going very well. That means potentially, you know, another big source of revenue if it's opened out globally and lots of other car company needs use the charging stations and give money to Tesla model why sales are going quite well, but there are so many red flags. The big price cuts they've been using to lift sales that are just dragging on operating margins, and the idea that you're betting on people's willingness to buy big, expensive cars. And if there is any kind of uncertainty about the economy, that will go badly wrong. Where's the cyber truck? I don't know self drive modes auton of driving.
Is the time where the windows broke during the stage demonstration.
Yeah, that's the one. It looks cool, but it's nowhere all right.
Thank you both for these picks. Elaine has Nvidia, Apple Alphabet, Rob has Microsoft, Amazon, meta and nobody picked Tesla, and people have been short Tesla a long time and the stock's proven a lot of doubters wrong. But maybe this time is different. We'll have to check back at the end of the year and see how our drafts did.
I feel terrible about my picks now I'd.
Like to take it off back.
I feel great about mine. I'm looking forward to going back and Jimson about them.
If Tesla is the best performing stock out of all of these, I think we will.
We will eat an actual crow on the podcast. I don't know where you get a crow, but I assume you can order one from an It's just.
The both of you crying well hacking away a crow. All right, We'll be back in a minute to talk about the stakes of our bet. Welcome back. This is normally the part of the show where we do a long and a short, but instead, for this special episode of on Hedge, we're discussing what the shame and the glory is going to be for the winner and the loser of this bet. Rob suggested eating a crow live on the podcast. I don't want to do that.
That's that we only have to do that if if Tesla is the best performer the unpicked. Yes, member of the Magnificent seven is the best performer of the bunch.
We do this star this annual stockpicking contest on the Unhedged newsletter, and you know we write either a maya culpa or a hey we got it right piece every year. Maybe we can do something like that.
I'm always happy to write a MAPA is my is my strength, your bread and butter. I mean, should we put should we bet on it? Elaine?
Sure?
Dinner? A beer?
I say beer? Well, uh yeah, A green.
Juice, yes, no, an iced coffee.
I hereby bet you the alcoholic beverage of your choice that my picks will prevail.
She's going to take you to one of the Martini places you reviewed a couple months back, and it's going to be Martini.
I don't know why I didn't say yes to dinner. And she's the most expensive place I can think of, because my bets are definitely going to do best in the os. But I'll take I'll take an expensive drink, okay.
One expensive drink at the winner's choice of venue.
Perfect rob Elaine will see you both back here in January. One person will be hanging their head in shame. One person will be pounding their chest in glory looking forward to that. All right, listeners will catch you next week for another episode of Unheedged see then. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from toeprafoeheads. Cheryl Brumley is the FT's global head of Audio special thanks to Laura Clark, Alistair Mackie, John Schnarz, Eric Sandler, and Jess Trulia. FT Premium subscribers can get the Unheedged newsletter for free, and a ninety day free trial is available to everyone else. Just go to ft dot com slash Unhedged offer. I'm Ethan Woo. Thanks for listening.
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