The investment thesis for chip players remains strong, given their free cash prospects over the next 12 months.
Nvidia (NVDA), Micron (MU), Broadcom (AVGO), and Applied Materials (AMAT) are expected to generate a record $430 billion in combined free cash flow over the next 12 months, according to BofA (see chart below). That would be more than triple what they generated just two years ago as the companies see unprecedented demand for their AI chips.
By contrast, the combined free cash flow of hyperscalers Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), and Oracle (ORCL) is projected to turn negative for the first time on record. That represents a massive reversal from the $260 billion peak in free cash flow reported by these companies in 2024.
"Chipmakers are becoming cash machines, while AI giants are burning record amounts of capital," strategists at the Kobeissi Letter said.
Wall Street is growing increasingly impatient with Big Tech's capital expenditures on artificial intelligence, projected to balloon 70% year over year and exceed $700 billion in 2026.
The "Magnificent Seven" stocks are now trading at their cheapest valuation relative to the S&P 500 (^GSPC) in more than a decade, according to Morgan Stanley.
The analysis looks at the price-to-earnings multiple premium for the Magnificent Seven relative to the other 493 companies in the S&P 500. The premium has held above 30% for most of the 2020s but is now closer to 10%.
All Magnificent Seven stocks have underperformed the S&P 500 in 2026 except for Alphabet, which has notched a 14% year-to-date gain versus the benchmark index's 8.8% advance.
The companies that make up the Magnificent Seven are Nvidia, Microsoft (MSFT), Alphabet, Amazon, Meta, Apple (AAPL), and Tesla (TSLA).
"We are going through another 'gut check' few weeks ahead for the tech trade as tech investors await a very important 2Q earnings season in July to further validate the AI Revolution buildout," veteran tech strategist Dan Ives said in a recent note.
"In the meantime jitters will continue as worries around the costs of this once in a generation tech buildout hit its next gear of growth," he said.
Brian Sozzi* is Yahoo Finance's Executive Editor, host of the 'Power Players With Brian Sozzi' podcast and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X** @BrianSozzi**,** Instagram**, and** LinkedIn**. Tips on stories? Email brian.sozzi@yahoofinance.com.*
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