Magnificent Six will 'dominate' future AI, tech waves: Analyst

D.A. Davidson has initiated coverage on Meta Platforms (META) — with a Buy rating and $600 per share price target — and Alphabet (GOOG, GOOGL) — with a Neutral rating and $170 per share price target.

Additionally, D.A. Davidson managing director Gil Luria has excluded Tesla (TSLA) in his Magnificent Seven coverage in the firm's "compute sector," grouping Meta and Alphabet with Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), and Nvidia (NVDA). On Tesla, Luria wrote “if it looks like a duck (greater than 90% of revenue from cars) and quacks like a duck (greater than 90% of profits from cars) it might just be a duck (a car company)" in a note on Tuesday.

Luria sits down with Julie Hyman and Josh Lipton on Market Domination to talk more about his call about these tech giants and their investments in AI and computing.

"Those markets require scale, reach, and capital. So unlike previous waves of technology innovation that came from startups, innovation now is coming from... these biggest companies. So these six companies will continue to dominate in AI and spatial computing, and extend their lead from the sectors they're already in — desktop and mobile computing, cloud computing and advertising, computing," Luria tells Yahoo Finance. "They'll keep dominating those and they'll dominate the next two waves."

Luria elaborates on how Meta is differentiating its AI usage and large language models from its Silicon Valley counterparts as prominent tech players continue to spend more on Nvidia chips.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video transcript

D a Davidson initiating coverage on meta and alphabet in a new note this morning.

And the ANA was saying that he is adding the names to the compute sector coverage.

We have the analyst behind that, not joining us.

Now a managing director at D A Davidson.

It's always great to see you.

I not interesting because as you point out, you unite a bunch of companies that are usually not covered by the same person at shops like yours, and you're putting them under that umbrella of compute.

Just briefly tell us your thinking in putting them all together.

Yeah, that these six companies are really providing most of these compute capabilities in the market, and especially over the last couple of years, they've taken in almost all the profit growth, which is why they performed so well.

And in the next markets they grow into which is a I compute and spatial computing.

Those markets require scale, reach and capital.

So unlike previous waves of technology innovation that came from start ups, innovation now is coming from these biggest customer from these biggest companies.

So these six companies will continue to dominate in a I and spatial computing and extend their from the sectors they're already in, uh, desktop and mobile computing, cloud computing and and advertising computing.

They'll keep dominating those, and they'll dominate the next two waves.

And interesting.

You know, I think about meta and you initiate their gil with with a buy.

One interesting thing I'd love to get your take on is you clearly saw in this earnings season big tech investors has kind of renewed, uh, scepticism about all this a I investment.

It seemed to be this theme of Show me Show me the return Show me the RO I with With meta though it seemed to be different.

Gil, where where analysts seem to believe Listen, all this a I investment is actually showing improved engagement.

Um, and advertiser RO I Is that how you're seeing it?

Absolutely.

And meta is not getting the credit for it.

They're trading at a below market multiple, while the other components of Microsoft NVIDIA, uh, apple are all trading at above market multiple towards the higher end of their multiple historical ranges, based on the notion that they'll win from a I, which they will, where Google and Meta are trading below their traditional multiples, meaning the market's not giving them any credit.

Now we think for meta, As you point out, a I is already working in their favour.

They're better at delivering ads.

They're getting higher yields on ads because of a I so that investment is already working for them.

And we point out that they're carving this very important, uh, market for open platform A. I compute.

So while Microsoft Open A I, Google Gemini and Amazon anthropic are fighting for the ground of having the closed source model that they control me has gone the other way, which is having an open platform that people can use their llama model, continue to improve it and to point Meta continues to benefit from that and based on the multiple, they're not getting credit for that.

So while meta is different than the others with that open source model, it is very similar to the others in that it is spending a lot of money on data centre build out on NVIDIA effectively, and you call that a sort of wealth transfer of the hyper scalers to NVIDIA.

Where are we in that cycle, if you will, that flow of investment.

And when is it gonna stop?

What is it gonna look like?

What's clear is that they can all win.

They can all grow their cash flow at the same time as NVIDIA.

Either.

These companies at some point get to a point where they say we have enough capacity, let's digest it, let's get some good returns on it and then get back to cash flow and margin growth.

Or they continue to transfer wealth to NVIDIA Uh, for the foreseeable future.

That's what the stock seem to imply that this is going to continue forever and these companies will be unscathed.

We don't think that's likely.

We We think there's gonna be a point likely next year, maybe the year after that, where all these companies, one after the other, say we've done this huge build out of data centres.

Let's digest it.

We can stop buying GP US for a while or let's use our own GP US for a little bit longer until we get that RO I So, Gil, you initiate meta with a buy.

Not as much love, though, for Alphabet Gil There you're on the sidelines.

It should initiate there with a neutral.

How come?

Well, let's contrast to what we just said about meta.

So in terms of positioning for the future, Google is gonna be in a fight with the other closed source providers for foundation models.

They're no longer really competitive for spatial computing.

And for them, A. I appears to be more of a headwind on their core business.

You just had this great conversation with Alexis about what the DOJ.

Wants to do.

The DOJ.

Has come out and said, Hey, Google has 90% share of search.

The search market market is changing.

We're gonna go to gen A. I enhanced search.

We don't want them to have that same share of the next generation.

So regardless of the quality of the case and whether they, the DOJ can PURs pursue it successfully, they're making a statement that they don't want Google to have the same share at a time where the market is transitioning and new competition is coming about.

From your cha GP T from your perplexity and others that want to take a bigger piece of this search with generative A I incorporated into it and and finally Gil, I wanna ask you about a company that you're not covering, that you explicitly say you are not covering, Do you say, Well, I'm putting the magnificent six in my coverage universe now, but there's one stock that you say is not like the others.

And I had to say it made me giggle at the end of your note, Um, at the end of your note summary.

Where where you talk about that?

Tesla.

Why don't you view Tesla as like these others?

Yeah, mo.

More than 90% of Tesla's revenue and profits come from making cars, so they're in the car market.

The the fact that they have potential for doing other things in the future is great, but that's a venture investment.

Right now they're they're in the car business.

Having said that, the player here isn't Tesla.

It's Elon Musk when I say that Meta has a big lead in terms of pursuing the next open platform, uh, Foundation A I model.

The second in that running is Elon Musk's grok that he has under Xa I, and if he continues to commit his personal resources to building that out, he can be competitive there as well.

But That's not Tesla.

That's an investment that's actually more part of X Twitter and really an Elon musk investment as opposed to a Tesla investment.

Gay always love to have you on the show.

Thanks for joining us.

Thank you.