The artificial intelligence trade has broadened out beyond the "Magnificent Seven," with power providers and companies in different parts of software and hardware stealing some thunder from the megacaps. But now the Mag 7 is starting to look mighty cheap following hyperscaler earnings last week that showed increasing returns on massive amounts of AI investment. Many traders and analysts are highlighting to start the week just how cheap the one-time high valuation group has become. For example, the forward price-to-earnings ratio for the Roundhill Mag 7 ETF is below 24, its lowest level since the ETF was created a little more than three years ago. Shares of the ETF were flat for the year through Friday's close, but earnings growth expectations have surged, lowering the forward valuation.
The forward P/E is based on earnings estimates for the next 12 months. Forward P/E multiples for Amazon and Meta have fallen by more than a third, and Nvidia's has nearly halved from one year ago. Alphabet's is flat and Apple's is slightly more expensive. JPMorgan traders said they thought there might be a "catch-up trade" in the Mag 7 since recent earnings showed that capital spend is getting justified by returns on investment.
"Mag7 / hyperscalers [were] under the microscope for capex spend and AI ROI and the cohort may be changing minds on AI ROI," JPMorgan traders wrote in a Monday note. "The group is trading more than two standard deviations below its mean from 2018 Q3 to Friday, on a forward P/E basis. This implies ~30% upside to just one standard deviation below its mean and ~56% upside to return to average valuation."
