Historically stocks that had a good run then tended to underperform:
> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.
> Historically stocks that had a good run then tended to underperform
This is more of a mathematical axiom than a financial effect, because you're defining "underperform/overperform" with respect to an average that contains them.
I am invested in some of the companies that are downstream of the capital expenditures of Big Tech (e.g., COHR), so I have nothing to complain about.
I am really struggling to see what's the investment thesis behind Google valuation increasing 2x in response to AI, though. Assuming no magical AGI singularity, by the end of the day, they're still selling the same services, but the services have gotten more expensive for them to provide. Everyone was already using Google Search, but now, provisioning AI summaries on top of requires more compute. Everyone was already using Google Docs and Meet, but now, AI features cost Google more. Etc, etc.
The only place where they stand to make money is selling AI compute to enterprises. But with the current supply-chain challenges, the margins there are probably getting thinner.
`I am really struggling to see what's the investment thesis behind Google valuation increasing 2x in response to AI`
Google is basically Nvdia (TPUs), Tesla (Waymo Self-Driving), Hyperscaler, Netflix (YouTube) and a massive VC (Anthropic, Databricks, SpaceX, etc.) all rolled into one.
Their valuation isn't really a 2x'ing so much as a reversion from halving.
It's frequently said that vonglomerates usually carry through as their valuation, the multiplier of the lowest holding. If that's the case, Alphabet is worth more broken up. Similarly that makes their current valuation (and nay any valuation) theoretically too low.
Google is a good bet because if AI continues to boom, they're in a good position (frontier lab, vertically integrated). If the bubble bursts and the frontier labs fail, they might do even better.
I like that the invisible hand of market is slapping the Mag-7 for capex which is the only way to discipline them. Investors are waking up to say: hey, you are spending all your profits on data-centers, where is the return for me ? But, it surprises me that there are vast pools of capital which we collectively call the "market" that makes these calculations, or maybe a simpler causal explanation is the missing stock repurchase bid. At some point, one of the hyperscalers (msft ?) will break from the pack and announce reductions to capex and increase stock repurchases to stem the decline.
My perception is that the market lumps companies together into sectors whether they have similar business models or not. When one is punished, other associated firms tend to be, too. You see this in any industry (not as a guaranteed rule, but in general).
Could outperformance of largest cap companies be partially explained by dividends paid by smaller caps? Reasoning behind this:
* Index investing raises in popularity, with index funds that automatically reinvest dividends being often preferred due to their tax efficiency.
* Large caps prefer to repurchase stocks, stock repurchases contribute fully towards a given company share price increase.
* Smaller caps still pay dividends, these dividends are then reinvested by index funds and the reinvestment is weighted by capitalization, so large caps share price benefits more from repurchases done with dividend cash paid by smaller caps. When dividend is paid, share price of a company that paid it is reduced, which further widens the performance gap between large and smaller caps.
While I agree with other comments indicating that the headline is drawing on a small period of data, other data in the deck is pretty compelling.
Page 25 "The number of data centers in the US" gives an interesting insight as to the magnitude of the data center boom. 60% more data centers are being planned or are under construction. This might actually be underselling it in dollar amount, as I believe the average data center size under construction is larger than the average data center already constructed.
Page 27 "Cyclically adjusted P/E ratio near all-time highs" is certainly concerning and points to a near term correction.
What TSLA lacks in cashflow, they more than make-up in TAM. Make-up as in create out of thin air. We'll have self driving cars in a few months, robots, semi-trucks, etc., etc.
Elon is missing the bigger TAM here. Once they've created a time machine, they can not only sell all these things backwards and forwards in time, they can also start making industrialization come way earlier, which will lead to exponentially turbo charged growth. Plus importing future designs into the now.
It makes sense to focus all effort into building a time machine.
Right, but they're smart enough to know how to manipulate the market short term with such "research" and then take advantage of it, all without breaking the law.
I'm astoundingly unimpressed by the quality of this slide deck. There's no analysis except that crammed into slide titles, like it's designed to bombard a room full of analysts with so many graphs that they shut off their critical thinking. Could a freshman business student not make this? Could a freshman business student with an LLM not make something more convincing than this?
I agree with the headline, but this really feels like analysis-slop. It's only remarkable in terms of who is publicizing it.
Markets are obviously, rationally, not happy about the overspending.
But what gives me pause is that a some of the mag 7 (think Meta) could change their mind on AI build-out tomorrow, and 1-year from now have the same amazing free cash flow they always did.
I don't think most people quite grasp the sheer size of the debt obligations Meta and specially Oracle have gotten into. Meta has done some clever tricks to keep it off the main books, but it IS there. If no AGI, its gonna drag them down for a decade.
I tend to agree. I suspect if we look back a few years from now that there was some overspending but I still believe the risk of not investing and missing out is greater than the current historical trend of capex spend. I have not looked recently but has demand of compute started to slow down. It was just a few months ago when companies like Anthropic were throttling users because there was not enough of it.
What has been the best way to determine return on the AI specific capex for hyperscalers?
I would naively expect Microsoft’s to be the highest since they are probably mainly just selling access to their capex through cloud since they aren’t seriously pursuing frontier AI, I’d imagine Google to be in the middle (selling TPUs, general cloud GPUs, Gemini, revenue lift on ads from better AI) but also spending heavily on infra to compete with OAI/ Anthropic, and then Meta to be on the low end since they are likely getting serious revenue lift from AI but not monetizing their models by API.
On slide 6, they list the Mag7 stocks (not defined in a foreword), but on slide 8 they list the free cash flow (FCF) of a somewhat different set of companies. Why not stick to the Mag7 FCF only? It muddies the waters.
True. This slide also struck me the most, but for the data it shows. Free cash flow for all the hyperscalers basically evaporated in the last couple of months, with Oracle in the minus. What does this mean?
Yes but the Mag 7 is the main focus, suddenly switching to a different set of companies is comparing apples to oranges. That slide belongs in an annex.
I think page 4 is a little disingenuous, I'm pretty sure you could pick lots of windows and show the mag 7 deviating negatively, but then later trends positive. I believe this whole thing will pop, but I'm not quite convinced it is just yet.
Page 8 for Oracle's free cash flow trending negative is really quite impactful. The Bloomberg AI bubble diagram [1] shows how this could really blow up. If Oracle falls they could take the whole market with them. We're just waiting on the mag 7 or any closely linked companies to fail to raise investment.
Page 16 really outlines how insane these evaluations are. I think most countries see it, hence aggressive selloffs of US bonds [2]. But everybody is just too insanely heavily exposed to it all now, it's going to wipe out everything. It's going to be a very awful time when heavily debt strapped countries can't issue debt anymore.
I think what we're going to see is some insane moves to keep these companies afloat longer in some desperate attempt to delay the pop, which will just make a bigger bubble. I could see Nvidia for example issuing bonds in excess of $100bn soon if the market has appetite for it [3].
as soon as you start calling a group of stock tickers the “magnificent 7” they’re destined to underperform, as that’s a feelings based assessment and many investors will continue to buy the feelings long past the value being fair.
“Do they make money? I don’t know but I know they’re magnificent!”
Completely missing the point of not adding Anthropic, OpenAI, SpaceX.
Mag7 is just an arbitrary list of companies that were coined at a specific time with no rigor.
If you must do rigorous analysis, then just like S&P 500 you need to add drop BigTech / High Growth companies continuously to this Mag7 (or Mag10) and then do analysis
> The once high-flying "Magnificent Seven" are looking more like the Dreadful Seven.
> The why: Wall Street is growing increasingly impatient with Big Tech's astronomical capital expenditures on artificial intelligence, projected to balloon 70% to exceed $700 billion this year.
This feels like telecom "massive demand, bad returns".
If a good enough model can be swapped in every few months, the value moves away from the model and toward cheap inference. That is great for users, but not always great for returns on huge capex.
The only mag 7 that had a shooter chance with models is Google rn so doesn’t seem like there being good enough models will be that negative for mag 7. Might even be better since they are the providers for the inference
Not mentioned in the comments but all those companies are taking significant debt and even issuing new shares.
One major part of the investment thesis in these companies were their constant stock buy backs. Now their gargantuan Capex that sees no end but acceleration is back at diluting investors.
I think the companies will keep doing fine, but the financial outlooks are no longer as rosy.
This is probably a hot take and I am by no means a financial expert and this is probably quite wrong. I personally think that attempting to value these companies using the same methodology as the history of all American companies is fundamentally wrong. Sure, some mom and pop small local regional business that overperformed is probably more likely to underperform. But when it comes to big tech companies, these companies are operating a data and capital flywheel that doesn't easily just slow down. I mean, you look at the history of these computer tech companies, especially software companies. They really haven't slowed down. Like, look at Microsoft. It's just been growing from the very beginning, pretty much.
This seems healthy to me. A market where returns are less dependent on seven mega-cap names is probably more stable, not less. If earnings growth broadens out and capital starts flowing back toward quality and free cash flow outside the obvious AI winners, that should reduce concentration risk and make the whole market less fragile.
they are building new narritaves with made up BS name like mag 7 this, that. it used to be faang BS but they updated so lower IQ folks gets into new narratives. Marketing dep. and fin. engineering working together. Another older one was ZIRP that, ZIRP this and you see lower and avg. IQ folks talk about it along with lots of bots. ZIRP bots stopped so MAG whatever bots can take over.
Waiting for next game, bets are open, any new names? O A S I S? upcoming IPOs and new names needed so they can exit scam
You can tell these guys know nothing about LLMs or how they’re provided. I love how they show OpenRouter’s graph of token usage as if it speaks for usage across the board. DeepSeek looks like the king because people who use Anthropic and OpenAI use them on either a direct basis or AWS Bedrock …
And the bar chart for token costs, really? As if that’s information? Their sources are the API docs ffs. If they had at least modeled something to estimate token costs that would be interesting, but showing the public prices and calling it research is dumb.
Apollo Group has $1T assets under management, I believe them over most folks on HN. Their argument that the Mag 7 is burning up all of their free cash flow is factually accurate, as the returns are not materializing for the investments being made (ie underperformance).
One is not spending anything out of the ordinary up until this point in comparison to their competition. But the Apple Silicon design group might start spending some money on something practical, something that might begin the typical Apple long-range process of replacing two or three existing companies within their current supply chain, but that’s nothing new over the last 25 years.
It is a bit unfair to lump Apple in with everyone else in the Mag7, as their strategy is arguably reasonable and prudent for the current position of the hype circle. Apple Silicon was a spectacular decision and investment. Everyone else has lost their damn mind.
Not based on the evidence of how they allocate capital. Meta wasted $80B on the Metaverse, for example. Apollo allocates capital as their day job. Mag7 allocates by vibes.
I have an opinion based on the data, yours may differ. Favorite this thread for when the music stops. It has before (1999-2000, 2007-2008), it will again.
I'm objecting to your categorization of the job of running one of the Mag7s as something other than "capital allocation". The CEO of Meta or Amazon or any of these other companies allocates capital all day long. They do it differently than an asset manager like Apollo for sure, and sometimes make worse decisions. But it's in the same category.
> Apollo Group has $1T assets under management, I believe them over most folks on HN
If only that's a measure of if they know how to time the stock market. The real measure is how much they earn not if their sales or marketing department manages to get more customers.
> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122
This is more of a mathematical axiom than a financial effect, because you're defining "underperform/overperform" with respect to an average that contains them.
Every time.
I look forward to your weather report too: "It's always sunny outside until one day it starts raining. Every time."
Years ago, My daughter's science teacher said that school should teach a love of learning.
I replied 'I thought the point of school was to make productive worker units in society'
And while he explained to me why I was wrong I was thinking to myself 'great, now he thinks I'm a terrible person'
It seems I deadpan too effectively.
I am really struggling to see what's the investment thesis behind Google valuation increasing 2x in response to AI, though. Assuming no magical AGI singularity, by the end of the day, they're still selling the same services, but the services have gotten more expensive for them to provide. Everyone was already using Google Search, but now, provisioning AI summaries on top of requires more compute. Everyone was already using Google Docs and Meet, but now, AI features cost Google more. Etc, etc.
The only place where they stand to make money is selling AI compute to enterprises. But with the current supply-chain challenges, the margins there are probably getting thinner.
Google is basically Nvdia (TPUs), Tesla (Waymo Self-Driving), Hyperscaler, Netflix (YouTube) and a massive VC (Anthropic, Databricks, SpaceX, etc.) all rolled into one.
Their valuation isn't really a 2x'ing so much as a reversion from halving.
Focus on cash/cashflow.
The market is both happy that Apple didn’t spend all its cash on AI build-out, but also at the same time angry that Apple is “missing AI”.
Not to mention the grumblings that Apple has peaked.
* Index investing raises in popularity, with index funds that automatically reinvest dividends being often preferred due to their tax efficiency.
* Large caps prefer to repurchase stocks, stock repurchases contribute fully towards a given company share price increase.
* Smaller caps still pay dividends, these dividends are then reinvested by index funds and the reinvestment is weighted by capitalization, so large caps share price benefits more from repurchases done with dividend cash paid by smaller caps. When dividend is paid, share price of a company that paid it is reduced, which further widens the performance gap between large and smaller caps.
Page 25 "The number of data centers in the US" gives an interesting insight as to the magnitude of the data center boom. 60% more data centers are being planned or are under construction. This might actually be underselling it in dollar amount, as I believe the average data center size under construction is larger than the average data center already constructed.
Page 27 "Cyclically adjusted P/E ratio near all-time highs" is certainly concerning and points to a near term correction.
It makes sense to focus all effort into building a time machine.
I agree with the headline, but this really feels like analysis-slop. It's only remarkable in terms of who is publicizing it.
But what gives me pause is that a some of the mag 7 (think Meta) could change their mind on AI build-out tomorrow, and 1-year from now have the same amazing free cash flow they always did.
I would naively expect Microsoft’s to be the highest since they are probably mainly just selling access to their capex through cloud since they aren’t seriously pursuing frontier AI, I’d imagine Google to be in the middle (selling TPUs, general cloud GPUs, Gemini, revenue lift on ads from better AI) but also spending heavily on infra to compete with OAI/ Anthropic, and then Meta to be on the low end since they are likely getting serious revenue lift from AI but not monetizing their models by API.
That is the slide that is likely to pop the economy.
Is that Oracle down there increasingly in the negative? & Amazon's free cash flow reaching zero?
Page 8 for Oracle's free cash flow trending negative is really quite impactful. The Bloomberg AI bubble diagram [1] shows how this could really blow up. If Oracle falls they could take the whole market with them. We're just waiting on the mag 7 or any closely linked companies to fail to raise investment.
Page 16 really outlines how insane these evaluations are. I think most countries see it, hence aggressive selloffs of US bonds [2]. But everybody is just too insanely heavily exposed to it all now, it's going to wipe out everything. It's going to be a very awful time when heavily debt strapped countries can't issue debt anymore.
I think what we're going to see is some insane moves to keep these companies afloat longer in some desperate attempt to delay the pop, which will just make a bigger bubble. I could see Nvidia for example issuing bonds in excess of $100bn soon if the market has appetite for it [3].
[1] https://archive.is/0bYLS
[2] https://sg.finance.yahoo.com/news/china-japan-uae-india-sell...
[3] https://uk.finance.yahoo.com/news/nvidia-raises-over-21-5bn-...
OK, I guess it _would_ be pretty hard to have an _unrecoverable_ crash...
“Do they make money? I don’t know but I know they’re magnificent!”
Mag7 is just an arbitrary list of companies that were coined at a specific time with no rigor.
If you must do rigorous analysis, then just like S&P 500 you need to add drop BigTech / High Growth companies continuously to this Mag7 (or Mag10) and then do analysis
https://finance.yahoo.com/markets/article/magnificent-7-stoc...
> The once high-flying "Magnificent Seven" are looking more like the Dreadful Seven.
> The why: Wall Street is growing increasingly impatient with Big Tech's astronomical capital expenditures on artificial intelligence, projected to balloon 70% to exceed $700 billion this year.
Amazon $200B
MS $190B
Alphabet $175B-$185B
Meta $115B-135B
https://finance.yahoo.com/news/apple-lazy-ai-strategy-could-...
If a good enough model can be swapped in every few months, the value moves away from the model and toward cheap inference. That is great for users, but not always great for returns on huge capex.
-signed a bitter somebody that had to buy a new SD card for my camera last week.
One major part of the investment thesis in these companies were their constant stock buy backs. Now their gargantuan Capex that sees no end but acceleration is back at diluting investors.
I think the companies will keep doing fine, but the financial outlooks are no longer as rosy.
This is why we are seeing a correction at those companies, perks and free food going away with constant layoffs and all time low morale.
Now the party is at Nvidia. But I will tell you that that will not last forever either.
Maybe even the state of unprecedented relative peace we had enjoyed.
Waiting for next game, bets are open, any new names? O A S I S? upcoming IPOs and new names needed so they can exit scam
And the bar chart for token costs, really? As if that’s information? Their sources are the API docs ffs. If they had at least modeled something to estimate token costs that would be interesting, but showing the public prices and calling it research is dumb.
I'm not sure what was said during what looks like a deck of a presentation? I'm hoping it wasn't this, because that's an obvious misfire.
That's more than their combined FCF, and they're borrowing to bridge the gap.
https://finance.yahoo.com/sectors/technology/articles/mark-z...
https://www.nytimes.com/2026/03/19/technology/mark-zuckerber... | https://archive.today/iEGAj
Lol what in the world? Is running a trillion dollar corporation anything other than allocating capital?
You can argue that Meta made a poor capital allocation decision with VR and perhaps continues to do so with AI.
Ah, the old _argumentum ad giletum Patagoniae_
If only that's a measure of if they know how to time the stock market. The real measure is how much they earn not if their sales or marketing department manages to get more customers.