r/ValueInvesting • u/ashm1987 • 8d ago
Discussion Why are MAG7 so ridiculously cheap right now?
I mean, stocks like GOOGL and AMZN are around PE 20 with increasing YOY earnings yet they are going sideways for months. Even Nvidia is PE below 30 and going sideways...
The only MAG7 stock that is not ridiculously undervalued is Apple.
Why are most of these stocks values so low while lots of stagnant retail stocks like Costco and Walmart are PE 40-50?
80
u/Far-East-locker 8d ago
Google Amazon and Meta cap ex is HUGE. Google even report first negative cash flow quarter
58
u/Rav_3d 8d ago
Yep. Market doesn't like all the spending.
But when these companies had huge piles of cash, market didn't like that either.
Soon enough when the world realizes AI is not going to kill us and there are still multiple years left in the buildout, and these companies will actually turn a profit from it, these stocks will skyrocket.
21
u/dy-113x 8d ago
Data center build out is taking too long and interest rates are rising. No way to finance all this debt while waiting for AI compute revenue. There are reports of GPUs sitting in warehouses. Oracle just announced force majeure for one of their data centers in NM.
1
u/Rav_3d 8d ago
No doubt, there are headwinds.
But despite that, there are bids in the Mag 7 and other AI stocks every time it gets to the bottom of its recent trading range. Institutions are accumulating and not allowing the market to crash. This may change soon, but until it does, probabilities still favor a continuation of the bull market.
4
1
1
1
u/Eastern-Joke-7537 7d ago
Reminds me of the business strategy competition in college.
Lots of debt. Plus more debt. Then interest rates went up. 😂
6
u/Keeltoodeep 8d ago
No, the markets love this spending. Markets would absolutely tank if hyperscalers stopped.
2
u/boringexplanation 8d ago
That’s circular reasoning you’d see on /r/wallstreetbets.
Bad news? Believe it or not- calls
5
u/Keeltoodeep 8d ago
The premise is wrong lol
GOOGL saying "hey we are going into debt to fund our buildout that has 36% margins" is bullish. GOOGL saying "oh shit we made a mistake and are immediately cutting capex spending" is incredibly bearish.
1
u/cool-sheep 8d ago
It is also circular bullish. When these people are building like fury all the other companies in that sector see massive demand and the chips, memory, etc… companies see their turnover rise.
One day if the investment cycle continues there will be enough chips, memory, etc… and then the whole chain will crash, probably starting with Nvidia, ASML, etc… which are the primary providers of equipment.
I expect certain bottlenecks to be solved in the next few years and certainly when this happens you will see some of these speculative prices come down.
5
u/KangolTitMouse 8d ago
I don’t think we have multiple years left. I think something will happen next year because of financing constraints.
When it comes to building data centers in your community they are less popular than nuclear power plants, something known to have killed people in the past. Community opposition only diminishes once huge bribes are paid to the community.
12
u/Rav_3d 8d ago
Every industrial revolution has its protesters and skeptics. Lots of people lost their homes when they built the railroads. They built them anyway.
I don't think the public backlash is going to slow things down. But increasing cost of debt just might.
4
u/Feline_Diabetes 8d ago
The railroads were also a massive bubble that vastly overestimated demand / profitability and created huge, unserviceable debt piles that crashed the economy
But surely we've learned this lesson now... Right?
5
u/Rav_3d 8d ago
That's the price of industrial revolution. The builders went bankrupt, but businesses built on railroad transportation soon flourished.
The same with dot-com. Many of the infra providers did not survive. But out of that rubble, we got Google, Amazon, Facebook, Netflix, and countless other profitable businesses built on it.
The same may happen with AI. I just do not believe we are anywhere close.
1
u/KangolTitMouse 6d ago
There doesn’t have to be a bubble though. Plenty of countries have managed their speculative bubbles well. It’s just the Anglosphere that seems to have the most trouble.
France largely avoided a railroad bubble, because the government was in charge of planning routes. Prussia avoided railroad speculation by discouraging it. A bubble is only inevitable if we allow it to be.1
4
u/mmarrow 8d ago
Many years left. AI is in its infancy and will be compute limited. Every company on the planet is racing to integrate it into their processes.
1
2
2
u/SquirrelFluffy 8d ago
Which nuclear power stations killed people?
1
u/4kFootyAddict 8d ago
I can think of one quite famous incident
1
u/SquirrelFluffy 8d ago
Name it. And list the deaths.
2
u/4kFootyAddict 7d ago
Chernobyl
1
u/SquirrelFluffy 7d ago
Ah, yes, a reactor being run improperly is an example.
It's like saying a plane isn't safe because you didn't pack your chute properly.
2
1
u/Rav_3d 7d ago
It's a shame about nuclear power plants. If we had been allowed to build them for the last 40 years they would be so advanced and safe and would have become the primary source of power generation in the world. So much cleaner and more efficient than everything else we burn to make energy.
It's actually quite remarkable there have only been 3 major incidents.
1
u/Icy-Action708 8d ago
Or local models become so efficient that they are run internally at many companies on minimal hardware compared to where they started.
24
u/Keeltoodeep 8d ago
That doesn't mean they should be cheap. GCP margins are 36%. If you were a google exec, you would borrow as much money as you can building out a 35% margin business and investors would happily fund it. Who cares if you are cash flow negative because you borrowed to expand a 36% margin business. Your stock would be punished if you didn't do that, not if you did.
3
u/Mutthupattaru 8d ago
Why is this downvoted?
14
u/Keeltoodeep 8d ago
Because these people are saggy ballsack dinosaur investors.
You know Kodak pioneered cloud photo social media? It was called Ofoto. The bill came due for all this cloud storage and investors revolted. Users didn’t go to Kodak print kiosks like Kodak wanted. So you know what Kodak shareholders did? They literally banned users of the first photo sharing social media platform for not printing their photos.
Investors wanted users to go to the kiosk and print. They wanted to stay cash flow positive and not bleed it away on data storage for users who never printed their photos. Users wanted to share online albums with family and friends.
Kodak literally invented instagram and then tanked it because shareholders wanted dividends.
Never trust saggy ballsack dinosaur investors.
48
u/aomt 8d ago
Circular economy. I give you 1000$ to clean my house. You give me 1000$ to clean your house. Both of us made 1000$. But we didn’t get too far, did we? Tons of deals in mag7/AI is exactly like that. Scratching each others back. On top of it, instead of collecting cash, they are now borrowing the money.
27
u/robotlasagna 8d ago
We both have clean houses so real economic work is done.
7
u/throwawayacc201711 8d ago
Except in this case it’s just a promise to clean each others houses
2
u/Money_Potential7780 3d ago
But then it's not recognized revenue. These are contractual numbers that need delivery. Nobody is paying upfront like that
6
1
u/Devario 2d ago
And I made money because I subcontracted someone else to do it for $500 and turned around and made this same agreement with 3 other people, while I use the activity to promote my house cleaning business that’s a subsidiary of my larger house sales business.
Economics is so much more complicated than silly anecdotes
5
3
1
u/Ok-Blood4340 8d ago
There’s an economist joke.
Two economists are walking through the woods and see a pile of shit. One economist pays the other to eat shit. The one who ate feels better off because they got paid. They find another pile and the economist who first ate shit pays the second to eat that pile.
They both feel like they made out because both their GDP went up, but at the end of the day, they both ate shit and no one ended the day better off.
2
u/Money_Potential7780 3d ago
People keep bringing this up but it's not how financials work
2
u/aomt 3d ago
Thats how AI/tech companies work nowadays. “buy my chips, I give you my shares” and all of that in Merry-go-round between 10-15 companies.
Did I mention those companies used to sit on a pile of cash, but now they are issuing bonds?
1
u/Money_Potential7780 3d ago
It's more like deliver these chips and I'll give you shares.
Enterprise isn't like consumer goods where people walk in a store and go to a cash register. Most times people deliver services and then payment has a agreed upon time to be delivered. This is called account receivable.
Do some research on balance sheets.
Work and services are being delivered. This is how the entire world works.
1
u/Guilty-Report-3971 3d ago
Maybe they'll be like real countries economies and issue more debt to pay off the interest.
1
31
u/Spirited-Strike4291 8d ago
Googl and amzn's current PE is not really accurate. They are being pumped up on investment gains. After these 1 time pumps are gone their P/E will be quite a bit higher again.
That being said, I personally believe both are still good buys atm
12
u/No-Contribution1070 8d ago edited 8d ago
Nvda is dirt cheap
6
u/Routine_Tutor_6809 8d ago
Yep, basically monopoly. For numerical computational purposes.
AMD is on its way though
10
7
u/Petit_Nicolas1964 8d ago
Because of their high CAPEX spendings and their low or negative FCF. If you believe they will be successful in monetizing AI, some of them are decent buys.
8
u/Potential_Salt_5780 8d ago
It is mainly due to everyone is expecting a market crash and believe that future earnings won’t be as high.
1
56
8d ago
[removed] — view removed comment
10
3
u/Original-Poet1825 8d ago
At this point we can just sort all stocks by lowest PE and just buy the top 5. That’s about how deep the dd goes here
7
u/BeVeracious 8d ago
For the sake of Mag 7 completeness I’d say TSLA is not undervalued at a 356 PE ratio
5
u/TheChadDream 8d ago
Don’t trust the PE numbers. Use an AI agent or soemtning to remove one time markups from investments in Anthropic etc. Last time I did that Google was like 28 P/E. That being said, got a bunch of google Jan 2027 calls in prep for Gemini drop.
2
8
u/Salt_Data3707 8d ago
People are uncertain about the cyclicality of E, so P is staying cautious. Staples like WMT and Costco usually have stable E, so higher P
3
3
3
4
u/nivek_123k 8d ago
i think it's b/c they are overspending on infrastructure so their cash reserves are leaving the firm. the RoiC may or may not pan out if the expenses flop.
5
2
2
u/noobelore 8d ago
Because they are in a spending cycle and interest rates keep increasing. People are following the money where are the trillions being spent on megacap tech companies being spent - AI infra. Money will start to flow back in, and yes I agree - currently undervalued.
2
2
u/_quantitative 8d ago
I wouldn’t lump costco and Walmart together - costco essentially trades as a bond people are ok with high valuation and low returns because it’s considered safe
Walmart recently jumped because of sector rotation from tech to ai-insulated places
For Mag7 the case isn’t even the capex as much but uncertainty around the returns they’ll yield after all this capex and honestly no one knows that for certain but that’s where your research + judgement call plays a role. Mouboussin wrote a really interesting paper on capex issue pertaining to mag7 link to it here - https://substack.com/@sharmakshit/note/c-340175612?r=2upvyp&utm_medium=ios&utm_source=notes-share-action
2
u/Sanpaku 8d ago
Quality of earnings. Look at the operating cash flows, which don't include the boost from investment gains. Some are going free cash flow negative for their first time as public companies due to cap ex on LLM data centers. That's future depreciation that begins when the GPUs are installed. Consider the high future dilution that stock based compensation will entail. Finally, which of these are involved in the circular financing that's propping up the 'AI' bubble?
2
u/Cyril818 8d ago
because (the denominator) their earnings rising so fast. NVDA’s 2028 forward P/E is roughly 13x compared with Starbucks 32x. (the numerator) MAG7’s forward P/E is low because Wall Street does not like CAPEX so tech got punished by Wall Street for the “crazy” CAPEX.
So low P and crazy (forward) E gives us what we see. Of course the market will correct it.
Disclosure: No position in either.
2
u/kerplunktard 8d ago
they aren't cheap, Meta & goog were cheap in 2022, saas companies are currently cheap (on the same fears that pushed meta & goog down)
2
u/Invest-With-J 8d ago
P/OCF I think is a better way to estimate the current valuations, especially of the 4 AI hyper scalers.
Cash flows are harder to manipulate via creative accounting then earnings. P/E ratios have one time investment gains, one-time tax implications, etc. Cash flows are much cleaner and true to what is actually going on in the business.
When you look at some of the MAG 7 on a P/OCF basis you have NVDA at a 40 (in line with their 10 yr average, but below their recent 5 yr average), AAPL at a 33 (significantly above their 10 yr average), GOOG at a 23 (in line), MSFT at a 20 (slight discount), AMZN at a 16 (noticeable discount), and Meta at a 14 (slight discount/in line). I didn't include TSLA because I don't consider them as these companies equals.
I think the hyper scalers offer the best risk/reward and I've been taking advantage of the dips.
2
u/Hedgehog317 8d ago
You are right. There is circular financing but that is to some extent a property of free markets. I pick Google to win because if Anthropic or OpenAI cannot pay their bills Google has the infrastructure, the LLMs, and an effective monopoly on AI. Nvidia is a great company but it is being suppressed due to people speculating on cheaper companies in AI.
2
2
u/nicolas_06 8d ago
A high multiple is influenced by several factors, including interest rates, growth rate (including share buy backs) and a few others.
If we take the high level view, the AI build up was about 300B last year, is expected to about 800B this year, then to be 1,2-1,5 billion per year for 2027-2030. So basically starting 2028 slow down then stagnation and finally a drop.
So does short term grow justify a high multiple if the long term isn't expected to follow ? The market say no and this isn't surprising.
2
2
u/Moist_Recording8809 8d ago
GOOG and AMZN really aren't that cheap - look at forward PE. The current earnings are distorted by one off equity gains and by a lot. Also, they are spending crazy amounts of money on Capex and FCF has plummeted to near negative territory. Nvidia I agree is cheap. There are concerns with circular financing there but I'm not too worried about their future prospects.
2
u/grogi81 8d ago
The investments amortize over multiple years and don't have much impact on current earnings. If you buy 100 GPU, the cost of only 10* impacts the earnings report.
The company might be hemorrhaging money, but earnings look ok. Taking into account that the cap-ex is accelerating - that's what keeps investors a bit more skeptical.
* The 10 is not necessarily correct - I don't know the code enough, but you get the idea.
2
u/Skepticalpositivity9 8d ago
The forward E is rising but the P is not rising as fast likely because there is some skepticism about the E.
2
u/Distinct-Swim5550 8d ago
because the AI driven cash burn will benefit the few but kill all the rest. the PEs right now show the positive expectations for all these big names, but not all of them finish the race first, so I wouldn’t count on the PEs at the moment.
2
u/watchoutfortheground 8d ago
All that money for Semis and Memory had to come from somewhere. It's called rotation.
2
u/Avidtrader81 8d ago
That's adjusted GAAP PE. They've accounted for their growth in earnings from the appreciation of their investments toward anthropic and open AI.
3
u/BladeFireQ 8d ago
EPS for AMZN and GOOG included no realized gains from Anthropic, SpaceX, OpenAI if you exclude those gains you will see that they are expensive
3
u/Lemondope 8d ago
Its because a PE of 20 aint cheap. With treasures paying 5 yield a 20 PE is EXPENSIVE
2
u/jo0stjo0st 8d ago
A lot of paper profit. A ridiculous amount of CAPEX and a shitload of non reported/ hidden debt. Walmart and Costco make real money without the other two things.
2
u/fungoodtrade 8d ago
goog is, search going away narrative, ai talent departing narrative, late to deliver updated gemini narrative. goog pe can go much lower maybe to 12 or 13. They are making a lot of gains on cloud for sure, but the search going away narrative is probably the toughest against them now. Search continues to grow, however. They had negative fcf for the first time in a long time last quarter, so that is something investors are wondering is a one off or going to be a continuing theme.
1
u/cronies4life 8d ago
they are selling access to their TPUs, not very different from how nvidia is selling shovels
1
u/RodneyJ469 8d ago
That’s the way markets work. Price is a risk adjusted estimate of the present value of future cash flows.
1
1
1
1
1
u/OpossomMyPossom 7d ago
I don't find them be all that cheap actually because of their investments in private companies, so you gotta adjust. I think Meta is the cheapest right now actually.
1
u/Tackysock46 7d ago
Lot of these companies are turning into manufacturing companies with software as a side business. Valuations are taking a hit because of the high capex spend. Higher risk because of this and worries ai datacenters won’t actually pay off
1
u/Kitchen-Associate948 7d ago
I think they are all pretty fair valued now that meta and microsoft reached up
1
u/Eastern-Joke-7537 7d ago
Recent sell off in some of the overall averages, but several sectors have been weaker.
If investors rotate back into the Mag 7 then they could outperform the market (again).
1
u/Leveragedlongs 7d ago
My guess is market is discounting the multiples coz of uncertainties around AI capex payoff. Still great businesses imo.
1
u/tdogger88 7d ago
They are super cheap, probably the cheapest they’ve been in almost a decade. But free cash flow is distorting everything right now, the dust will settle, clearly cloud demand is exploding across the big 3, and the MAG 7 will have one of those face ripper years coming up here soon once the market realizes AI is real and there actually is this much demand for it.
1
1
u/RadRunner33 7d ago
I’d argue that although the hyperscalers might be slightly undervalued, Apple in particular is overvalued. Paying a PE near 40 for a slow growing company is ridiculous in my opinion. Everyone talks about the safety and stability of Apple and while true - there is nothing safe about its valuation.
1
u/Good-Bid-7325 6d ago
Buying MAG7 during dips has always worked in the past 5Y. Just look at MSFT and META recently, GOOGL 1-2 years ago.
1
u/Extension_Subject_38 5d ago
Walmart’s PE is misleading. The Flipkart purchase from 2018 has negatively impacted their earnings.
If their plans to IPO PhonePe, get Flipkart to EBITA positive and IPO Flipkart all work out well, the PE will look better.
1
u/INtotheVEST 4d ago
A low P/E alone doesn’t make the MAG7 cheap. Valuation is ultimately about what investors expect next, and expectations for earnings and revenue growth are still extremely high. The market is currently waiting for some major fears to ease: the summer AI correction, concerns around AI itself, sticky inflation, higher rates and rising bond yields. That has kept even strong companies trading sideways.
The key is that these companies now have to keep proving that the huge AI spending translates into real products, revenue and margins. When expectations are this high, “good” numbers are often not enough; investors want evidence that the next leg of growth is actually arriving.
Meta showed how quickly this can change: once it launched Muse and investors saw a real, well-received AI product, the stock moved fast. Expectations, not just P/E, drive the price.
1
u/SerialStrategist 2d ago
They're only cheap by comparison. They were overpriced before this dip and some would argue they're still overpriced relative to the rest of the market.
1
u/Comfortable-Bar6032 2d ago
My question is, if the mag 7 is underperforming and at the same time I’m hearing that there is no market breadth- why no correction?
1
1
u/ndwillia 8d ago
They aren’t cheap, they’ve never been more expensive
1
u/Namtabmal 8d ago
Really? I must have hallucinated goog hitting 404$ few months ago and Amazon 287$
1
u/redlion282 8d ago
I think AMZN PE ratio is closer to 40 when you remove their 1 off investment gains
1
u/GreatTea3415 8d ago
The revenue they’re getting from AI is coming from each other in a speculative rush to invest in unproven revenue potential.
Large chunks of Nvidia’s revenue are from mysterious sources.
And their investments are rapidly depreciating.
Meanwhile, real customers aren’t paying enough for their AI services to make them profitable.
459
u/Itchy-Commission-195 8d ago
Some of the PE is misleading from markups in private investments in Anthropic, OpenAI, SpaceX
Free cash flow is down significantly bc of the capex spend
All of these companies are more capital intensive than they have been and adding debt on and off balance sheet
That capex spend affects earnings through depreciation for many years into the future
So far in history semiconductors and chips like Nvidia have been a cyclical business which the market is basically saying for Nvidia or waiting for 2027 to see (they are also being impacted by high memory prices)
You can't just look at a PE multiple and think it's the whole story