Chapter 12 pointed out that growth at risk can be associated with large-cap firms, flipping the small-cap return premium. Recent years have seen growth in large-cap firms, the “Magnificent Seven” being the marque example. For these firms, growth paid off2Mthe expected growth built into the market price was realized. But the shock to their stock prices in 2022 suggests caution: Growth is at risk. The expectation of growth continued in 2024 with prospects of value from developing and applying AI. However, many firms were entering the AI race with the outcome to these endeavors up in the air. Apple, Microsoft, Meta, Google, and Tesla were on track to invest a combined $280 billion in AI in 2025 in one of the biggest capital expenditure booms since World War II. The payoffs?
The value investor focuses on growth and the risk to growth: Do I want to buy growth? Can I bear the risk of buying growth? Here is the price that the market was putting on growth for some large-cap firms involved with AI in January 2025. The calculations are those of chapter 4 with a 10% required return. The no-growth price is based on book value and analysts’ consensus EPS forecast for 2025. The growth price is a percent of the stock market price.
| Stock Price | Forward EPS | Growth Price/Stock Price | |
|---|---|---|---|
| Apple Inc. | $242.70 | $7.39 | 69.6% |
| Microsoft | $424.56 | $15.08 | 64.5% |
| Meta Platforms | $610.72 | $25.38 | 58.1% |
| Tesla | $394.94 | $3.25 | 91.8% |
| Alphabet (Google) | $195.39 | $8.97 | 56.0% |
The growth price is the number to challenge. From an understanding of AI developments, you might choose one, all of them, or none of them. Without this understanding, you might consider the risk to growth is too high. Develop a growth-risk profile as in chapter 8. Beware of buying growth.
