Is it time to sell the Magnificent 7?

Q. You have been a long-term investor in many of the world's largest and most successful technology companies including six of the Magnificent Seven. They've enjoyed incredible growth in recent years, but in general, it becomes harder for companies to continue to grow quickly the larger they become. Do you think there's still plenty of room for growth in these names?

Aziz Hamzaogullari: You're making a great point that future growth prospects are very, very important. If you look at our portfolio you will find that we have owned Alphabet, Amazon, and Microsoft for 18-plus years now. In the case of Meta we have owned it since its IPO in 2012, and we’ve owned Nvidia since early 2019. Tesla is the most recent edition, which we bought in 2022 when the market went down - and so did Tesla. We took advantage of the price weakness to initiate our position. But future growth is really always dependent on where you are in terms of penetration versus your market opportunity.

So, in case of Alphabet and Meta, their growth has really been driven by the shift to online advertising and that shift has been going on for the entire time that we have been investors in both. When I look at the future growth prospects, the structural shift to online advertising is still very much intact because of the total annual ad spending globally - it's trillions of dollars - only one-third or so is online spending, whereas consumers spend more than half their time in online.  So we still see a lot of future growth.

Similarly, with Amazon and e-commerce penetration, we think there's much more growth left. When we invested in Amazon 18-plus years ago, the penetration for e-commerce into global consumer expenditures was around 2% or 3%. Today, it has grown to only 10% to 20% penetration depending on the region that you're looking at worldwide. We still believe that there's tremendous growth left. Similarly, in AI and in media, there's more growth left. With Tesla, EV penetration is in the very, very early stages, and we believe many years of growth remain in these companies.

Q. Many of these mega-cap technology companies are heavy investors in AI. How successful do you think they will be at turning this investment into revenue and profit, and how long do you think it will take for that to happen?

AH: You are right that these investments are very significant. The Magnificent Seven, collectively, account for roughly 40% of the research and development spend of the top 1,000 companies in the United States. So, these seven companies account for $4 out of every $10 put into research and development in the US. Most of these companies - whether it be Amazon or Meta or Alphabet - have been investing in AI for many, many years, and they're already monetising that spend. For example, the introduction of Meta’s video product has all been driven by AI. What it feeds to consumers is all driven by AI.  So Meta, too, is already monetising its AI investments.

In general, I think AI is the biggest structural shift that we have seen in the three decades since the internet revolution. The impact of it will be tremendous productivity gains for many companies. However, the direct beneficiaries will be only a handful of companies, no different than how it was for the internet revolution. Though every company benefited in terms of productivity gains, the direct beneficiaries of the internet revolution were really just a few businesses.  It was those companies that were able to provide the internet products and services, as is the case with Meta or Amazon or Nvidia or Microsoft or Alphabet, when it comes to AI.

Listen to the full podcast this Q&A was based on where Aziz discusses the future prospects of the mega-cap tech stocks as well as his team’s Alpha Thesis - the deeply held beliefs and disciplined process which guide what they do every day.