Investors in leading artificial intelligence (AI) stocks have been rewarded handsomely in recent years, as the revolutionary technology - which gained mainstream momentum with OpenAI's ChatGPT - has evolved from becoming a mere buzzword to a must-have tool that enterprises across multiple industries are racing to adopt and implement. And AI chip stock Nvidia (NVDA) has been the poster child of this movement, as the Jensen Huang-led company's shares have become a multi-bagger investment, creating massive wealth for its shareholders. Up a staggering 2,511% in the past five years, most analysts believe there is more upside still to come for NVDA.
However, Q3 2024 was a disappointing stretch for Nvidia stock. During the July-September quarter, NVDA shares shed 1.7%, as the stock notched the largest market cap decline in history during the period on the heels of its quarterly earnings report.
But while Nvidia was cooling its heels over the past few months, three of its peers in the “Magnificent 7” club comfortably outperformed the AI chip leader's returns. While shares of Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT) all joined Nvidia in delivering a relatively underwhelming quarter, Q3 of 2024 was a very good one for investors in iPhone maker Apple (AAPL) (+10.7%), Facebook owner Meta (META) (+13.6%) and Elon Musk-led Tesla (TSLA) (+32.2%). Here's a closer look at these mega-cap outperformers.
#1. Apple Stock
Cupertino-based behemoth Apple (AAPL) has gone far beyond being a mere tech company. Co-founded by the legendary Steve Jobs and now helmed by Tim Cook, Apple has become a consumer brand synonymous with aspirational devices, and has been a part of our cultural zeitgeist for years.
With products like its flagship iPhone, Macbooks, Apple Watch, Air Pods, and iMacs in its repertoire, all connected by the ecosystem of its highly profitable Services business, the company is now the most valuable in the world, with a gargantuan market cap of $3.57 trillion.
Up 17.5% on a YTD basis, Apple stock offers a dividend yield of 0.43%, backed by 10 years of consistent growth. Further, with a payout ratio of just 14.89%, Apple can comfortably continue to grow its dividends in the coming years.
In the most recent quarter, AAPL beat estimates on both revenue and earnings. During its fiscal Q3, Apple's net sales rose to $85.8 billion, up 4.9% on growth in both Products ($61.6 billion, +1.6% YoY) and Services ($24.2 billion, +14.1% YoY). The company reported record-breaking revenues in two dozen countries, including Germany, Canada, Mexico, and the UK. Q3 EPS rose by 11.1% to $1.40, surpassing Wall Street's expectations and marking the company's sixth consecutive quarterly earnings beat.
Always a cash-rich company, Apple closed the quarter with a healthy cash balance of $25.6 billion, more than double its current debt levels of $12.1 billion.
Apple's launch of new iPhone 16 models has shifted Wall Street's attention to its AI strategy. In addition to the usual selling points, Apple said it will gradually roll out Apple Intelligence to approximately 40% of its iPhone user base by the end of this year, with plans to expand that to over 70% by the end of next year.
Apple Intelligence will focus on enhancing user experiences through new writing tools and emojis, improving photo capture and editing for reliving memories, offering smarter email and notification summaries for better prioritization, and refining control features with upgraded Siri, improved natural language understanding, and personalized settings. Notably, a recent Morgan Stanley survey revealed that nearly 60% of iPhone owners planning to upgrade in the next 12 months, citing Apple Intelligence as an important factor in their decision.
Before the device launch, Apple has been building up its AI prowess quietly over the years. Between 2016 and 2020, Apple was the biggest acquirer of AI startups, scooping up 25 companies in the process. The company also has its own AI large language model (LLM) named Ajax, which has been trained on more than 200 billion parameters. It is also working on a new version of Xcode and other development tools that build in AI for code completion, which should improve the quality of third-party apps on the iPhone.
Analysts have an average rating of “Moderate Buy” for AAPL stock, with a mean target price of $247.55. This indicates an upside potential of about 10.1% from current levels. Out of 31 analysts covering the stock, 18 have a “Strong Buy” rating, 4 have a “Moderate Buy” rating, 8 have a “Hold” rating, and 1 has a “Strong Sell” rating.
#2. Tesla Stock
Helmed by its charismatic, maverick CEO Elon Musk, Tesla (TSLA) is a leader in the fast-growing electric vehicle (EV) market. The newly Austin-headquartered company is a leading manufacturer of EVs, solar panels, and battery storage systems. They aim to accelerate the world's transition to sustainable energy, with ambitions in AI and robotics, as well. Tesla's market cap, which years ago surpassed the $1T mark at its peak, currently stands at $834.3 billion.
Tesla stock is up 4.6% on a YTD basis, after having spent much of 2024 in negative territory.
Tesla's results for the latest quarter were a mixed bag, as earnings missed estimates, while revenues came in stronger than expected. Tesla reported revenues of $25.5 billion in Q2, up 2% from the previous year, helped by strength in energy generation ($3 billion, +100% YoY) and services ($2.6 billion, +21% YoY). However, a 7% decline in the company's core automotive revenues to $19.9 billion was disappointing.
Further, Tesla's Q2 EPS fell 43% YoY to $0.52, as it failed to surpass Wall Street's consensus estimate for the fourth consecutive quarter on softening operating margins. Production and deliveries slipped by 14% and 5% from the prior year to 410,831 units and 443,956 units, respectively. Tesla is currently still the world's largest EV seller globally, holding roughly 51% of the U.S. electric vehicle market by the end of 2023, with plans to sell 20 million EVs by 2030.
However, the company's cash generation capabilities remained robust, with net cash from operating activities coming in at $3.6 billion, up from $3.1 billion in the year-ago period. Overall, Tesla's liquidity position remained solid as it closed the quarter with a cash balance of $30.7 billion, up from $23.1 billion in the prior year.
Tesla is investing heavily in the autonomous vehicle (AV) market, a sector expected to grow at a blistering 28.6% CAGR by 2032. The company's efforts on AV will be in focus later this month, when the long-promised robotaxi makes its debut in an Oct. 10 event.
Outside the usual crop of TSLA bulls, none other than Goldman Sachs (GS) recently recommended buying call options on TSLA to take advantage of the stock's catalyst-packed month of October, which also includes the release of Q3 earnings and delivery numbers.
However, analysts maintain a consensus “Hold“ rating for TSLA stock overall, and the shares have already outpaced their average price target of $201.89. Out of 36 analysts covering the stock, 10 have a ”Strong Buy” rating, 1 has a “Moderate Buy” rating, 18 have a “Hold” rating, and 7 have a “Strong Sell” rating.
#3. Meta Platforms Stock
We conclude our list of Q3 Mag 7 outperformers with Facebook owner Meta Platforms (META). Founded in 2004, Meta operates a wide range of social media platforms under its “Family of Apps” umbrella, including Facebook, Instagram, WhatsApp, Threads, and Messenger, serving billions of users worldwide. Due to the ubiquity of its offerings and near-monopoly in the social media landscape, the Mark Zuckerberg-led company now commands a market cap of $1.45 trillion.
META stock has been on a tear in 2024, zooming 63.4% higher on a YTD basis. It also offers a dividend yield of 0.35%.
Notably, Meta's rise to a trillion-dollar market cap has been driven by significant compounding in its revenue and earnings over the years. Over the past 10 years, while Meta's revenues have compounded at a CAGR of 31.07%, earnings have grown at a CAGR of 35.97%.
In its results for the second quarter, Meta surpassed both revenue and earnings estimates. Meta's revenues for the quarter came in at $39.1 billion, up 22% from the prior year, while EPS popped by 73.2% to $5.16, outpacing the consensus estimate of $4.72. This marked META's sixth consecutive quarterly earnings beat.
The company generated net cash from operating activities of $19.4 billion, up from $17.3 billion in the year-ago period, and Meta closed the quarter with a healthy cash balance of $33 billion.
The recent Meta Connect 2024 event has raised expectations, with the company pivoting more towards AI and virtual technology, while positioning social media as a foundational element in its broader ecosystem. Management emphasized their goal of making Meta AI "the most used AI assistant by the end of the year." They also showcased AI translation services, featuring UFC Champion Brandon Moreno, underscoring the company's celebrity-driven marketing approach.
Particularly impressive was the demonstration of emotive language and video overdubbing technology, which alters a speaker’s lips to match translated speech while maintaining their original tone. This innovation holds immense value for global connectivity, and could make Meta a key player in international business communication.
In addition, Meta is gaining traction in the virtual reality (VR) space, further competing with Apple’s Vision Pro headset. During the event, Meta introduced the Quest 3S, a more affordable version of the Quest 3, priced at $200.99 for the base model. The company also slashed the price of its 512GB Meta Quest 3 VR headset by $150, making it $499.00, significantly more affordable than the $3,499 Vision Pro. This price strategy positions Meta well to capture a larger share of the growing VR market.
In the meantime, Meta is leveraging AI to strengthen its core advertising business. The company’s AI ad tools are gaining widespread adoption, with over a million advertisers creating more than 15 million ads using these tools in the past month. Campaigns that employed Meta's generative AI ad features saw an 11% increase in click-through rates and a 7.6% higher conversion rate compared to those that did not.
On average, analysts tracking Meta stock have assigned a “Strong Buy” rating, with a mean target price of $585.16. Out of 45 analysts covering the stock, 39 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 3 have a “Hold” rating, and 2 contrarians have a “Strong Sell” rating.
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