The Magnificent Seven is a group of stocks that includes Amazon.com Inc., Alphabet Inc., NVIDIA Corp., Tesla Inc., Meta Platforms Inc., Apple Inc. and Microsoft Corp. Together, these companies were the drivers of most of the S&P 500's gains last year.
It is not just their stocks that soared in 2023. Driven by strong demand for cloud services and artificial intelligence infrastructure, many of the companies also saw significant increases in their profits and cash.
For 2023, the Magnificent Seven's free cash flow is expected to grow by 34% year over year to a whopping $309.2 billion, a growth rate higher than that seen during the pandemic-fueled boom of 2020, according to S&P Global Market Intelligence data. Nvidia, the last of the group to report 2023 financials, is expected to report the biggest increase in cash flow, with a projected total nearly six times higher than the previous year.
This growing pile of cash must be deployed somewhere, and M&A remains unfeasible. Regulators have made clear they will keep a close eye on Big Tech's every M&A move.
Amazon was the latest to abandon a deal, ending its pursuit of iRobot Corp. after objections from European authorities. Microsoft was able to complete its Activision Blizzard Inc. acquisition last fall, but only after two years of negotiations with regulators. In 2023, Meta was forced to sell Giphy Inc. after UK antitrust authorities objected to its 2021 acquisition of the animated GIF search engine. Nvidia attempted to acquire Arm Holdings PLC in 2020 but dropped the pursuit two years later as a result of "regulatory challenges."
The regulatory environment is not looking any more welcoming in 2024 following the release of new merger guidelines in December 2023 from the US Department of Justice and the Federal Trade Commission. The updated guidelines presume a deal is unlawful at lower thresholds of post-merger industry concentration, meaning deals that would have been allowed in the past would now be blocked. The agencies also said if a deal is part of a series of acquisitions, the whole series could be at risk of being challenged by the regulators.
The increased scrutiny, coupled with higher interest rates and other factors, has caused the Magnificent Seven as a group to step back from dealmaking. Not even during the depths of the 2008-2009 financial crisis was M&A activity by these companies as weak as it was last year. In the three years before 2023, these seven companies collectively shelled out $148 billion for 96 acquisitions, Market Intelligence data shows. That works out to an average of almost $50 billion a year or 32 annual transactions.
In 2023, the Magnificent Seven spent just $0.31 billion on six transactions.
"It is a tough M&A environment for Big Tech with the current enforcement focus," said Neil Hoolihan, a partner at law firm Linklaters, in an interview. "Large tech companies will have to carefully consider which regulatory battles they're willing to fight."
In the absence of M&A possibilities, the growing cash pile must be directed elsewhere.
For instance, Meta is returning some of the cash to shareholders, having announced a $70 billion share buyback and instituted a dividend. Microsoft and Apple followed a similar strategy in previous years. Others could follow suit. Goldman Sachs analysts said in a Feb. 7 research note that Amazon and Alphabet could also issue dividends.
Meanwhile, the AI race is demanding huge up-front cash investments. Alphabet, Microsoft and Amazon all mentioned on their earnings calls that they expect capital expenditures to increase in 2024, as all of them spend on further cloud development amid strong demand. Meta also mentioned that capex will increase, largely due to AI initiatives, which are viewed more favorably by Wall Street than the metaverse investments Meta made in recent years.
A less obvious deployment of cash is strategic investments in startups. In 2023, the Magnificent Seven participated in 180 funding rounds that were together worth $29 billion, up from $15 billion in 2022.
Microsoft alone reportedly invested $10 billion in ChatGPT creator OpenAI. Nvidia increased the number of its investments fourfold in 2023.
