The Truth About The Magnificent Seven Stocks

Temel Kavramlar

The author discusses the strategic imperatives and lessons learned from the performance of the Magnificent Seven stocks, highlighting the shift in cost structures and the importance of leveraging scale in today's business environment.

Özet

The article delves into the concept of 'The Magnificent Seven' stocks, including Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. It explores how these companies have driven significant gains in the S&P 500 due to their unique business models and cost structures. The discussion emphasizes the shift from variable to fixed costs in modern businesses and how this impacts strategic imperatives. Additionally, it touches on the importance of leveraging scale for competitive advantage in high-fixed-cost industries. The variability across the M7 companies is analyzed based on their variable/fixed cost ratios, showcasing different approaches to scaling and profitability. Furthermore, the article highlights that low variable costs are not the sole factor for success and discusses how companies like Meta and Tesla face challenges despite their cost advantages. Lastly, insights are shared on where-to-play/how-to-win strategies within the M7 group.

İstatistikler

The S&P 500 advanced 24% in 2023.
The Magnificent Seven (M7) surged ahead by 107%.
COGS was 72% of revenue in 1972.
By 2012, COGS were down to 51% and SG&A up to 24%.

Alıntılar

"Groups of companies are rarely as homogenous as they seem."
"Lists like this never last forever."

Önemli Bilgiler Şuradan Elde Edildi

The Magnificent Seven Stocks

by Roger Martin : rogermartin.medium.com 03-04-2024

https://rogermartin.medium.com/the-magnificent-seven-stocks-16f9fd03a5b3

Daha Derin Sorular

How might shifts from variable to fixed costs impact future investment strategies?

The shift from variable to fixed costs in business structures can have significant implications for future investment strategies. As more companies move towards a higher proportion of fixed costs, there is an increased imperative to scale operations. In industries with high-fixed-cost structures, maintaining competitiveness requires achieving economies of scale to spread out these fixed costs over a larger revenue base. This means that companies need to focus on growth and expansion to remain competitive in the long term.
Investment strategies will likely need to prioritize companies that have successfully managed this shift towards fixed costs and have demonstrated the ability to leverage scale effectively. Understanding how different businesses allocate their costs between variable and fixed components can provide valuable insights into their strategic positioning and potential for sustainable growth.

What risks do companies with low variable costs face when competing with rivals?

Companies with low variable costs may face certain risks when competing with rivals, despite the advantages they gain from operating leverage at scale. One key risk is related to pricing competition, especially in industries where marginal production or distribution costs are minimal. Low-variable-cost businesses may engage in price wars as competitors try to undercut each other, leading to margin erosion and potentially eroding profitability.
Another risk for companies with low variable costs is the threat of being outcompeted by rivals offering superior value propositions or differentiation. While scaling rapidly can help drive down unit costs, it does not guarantee sustained success if customers do not find the product or service compelling enough compared to alternatives in the market.
Additionally, high operating leverage businesses like those with low variable costs are highly sensitive to changes in demand or market conditions. A downturn in sales could disproportionately impact profitability due to the fixed nature of many cost components, making these companies vulnerable during economic downturns or periods of heightened competition.

How can understanding both samenesses and differences deepen strategic analysis beyond just financial metrics?

By considering both similarities (samenesses) and differences across various entities within a given context, strategic analysis can be enriched beyond just financial metrics. Recognizing commonalities allows analysts to identify trends, patterns, or shared characteristics that may influence industry dynamics or competitive landscapes.
On the other hand, acknowledging differences helps highlight unique strengths or weaknesses among competitors that may not be immediately apparent through financial data alone. Understanding what sets individual firms apart from their peers enables a more nuanced assessment of their strategic positioning, capabilities, and potential vulnerabilities.
By integrating both samenesses and differences into strategic analysis processes, decision-makers can develop more comprehensive insights into market dynamics, competitive threats/opportunities,and long-term sustainability factors affecting organizations within an industry segment.