Craig Coben is a former global head of equity capital markets at Bank of America, a managing director at Seda Experts, and an Alphaville contributing writer. David Erickson is a former global head of equity capital markets at Barclays and is now a lecturer at Columbia Business School.
In The Magnificent Seven (1960), a band of gunslingers saves a Mexican village from bandits and, along the way, teaches the villagers how to fight back. What makes the ending so poignant is that the heroes have rendered themselves redundant. The villagers no longer need outsiders. So the men ride away, realising the world has moved on because they succeeded.
However, nowadays many people will be more familiar with Three Amigos, an amusing pastiche starring Martin Sheen, Chevy Chase and Steve Martin. It’s an open question whether the same fate awaits the Magnificent Seven of the stock market.
Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla have dominated the stock market over the past decade, but could now plausibly be usurped by the “Three AImigos” — OpenAI, Anthropic and SpaceX.
Earlier this month Elon Musk listed SpaceX in a blockbuster offering with its stock market value rocketing ahead of both Amazon and Microsoft before settling down at around a $2tn market cap (for now). Although it’s best known for its rocket technology, much of SpaceX’s value actually derives from the AI dreams of its founder, Elon Musk.
Many analysts are scratching their heads about the value assigned to SpaceX by investors. Understandably so; when SpaceX briefly passed Microsoft, its valuation was trading at more than 140 times last-twelve-months revenue, compared to Microsoft at 22.5 times LTM earnings. Or as fund manager Bill Ackman tweeted (presumably channelling his inner Yogi Berra): “One of the reasons that makes SpaceX so valuable is how valuable it is.”
Meanwhile, Anthropic and OpenAI have filed confidentially with the US Securities and Exchange Commission in preparation for their stock market debuts. With these IPOs, the Three AImigos are charging into the public markets, likely dominating investor interest much as they have in the private markets for the last few years.
The question now is what happens to the Mag7, which hitherto have largely basked in reflected glory as “AI-adjacent” names and have often acted as a proxy trade for the Three AImigos.
The Mag7’s returns have been phenomenal in recent years, and now account for roughly a third of the S&P 500 by market cap. For much of that time, owning them was also an indirect way to own the AI story, not least due to the significant ownership by the Mag7 of the Three AImigos.
As recently as last autumn, Microsoft held a 27 per cent stake in OpenAI; Alphabet had a roughly estimated 14 per cent stake in Anthropic and 5 per cent of SpaceX; and Amazon’s early investments in Anthropic are now worth over $70bn and it recently committed to investing an additional $50bn into OpenAI. Nvidia is linked financially to all Three AImigos, and also offers exposure to the infrastructure they run on.
In other words, the Mag7 long offered one of the only listed ways into AI. But what happens when the originals become investable?
Proxy trades carry the seed of their own demise, making the stand-in stand out for the wrong reasons. In the most recent quarter, almost half of Alphabet’s record $62.6bn profit and more than half of Amazon’s pre-tax profits arose from marking up their Three AImigo investments.
There’s precedent. Prior to Alibaba’s 2014 IPO, investors bought Yahoo as the easiest way to gain exposure to China’s e-commerce boom. Once Alibaba went public, Yahoo turned into yesterday’s stock. Its Alibaba stake was worth more than the entire company, implying the market valued the rest of Yahoo at less than zero. Microsoft and Amazon are much stronger businesses than Yahoo ever was, but now with SpaceX last week eclipsing both in value, the rotation question is live.
There’s also a broader implication. The rise of the Three AImigos not only poses a potential threat to the Mag7, but also reflects a deeper change in how capital markets work.
For much of the last century, public markets provided the venue for ambitious companies to raise capital. Today, the most valuable companies spend their formative years in private markets, growing by raising institutional capital in successive rounds long before public investors ever get access.
This upstream migration of investment creates a specific dynamic: Capital flocks to a handful of public mega-caps and a small group of highly-valued private companies. The smaller companies in between — often promising growth engines — are increasingly overlooked.
This dynamic affects many of the 32,000 companies estimated to be held by private equity funds and the over 1,700 venture-backed “unicorns” unlikely to ever reach mega-cap status. As investor attention, research coverage and liquidity migrate toward either established giants or private-market winners, the traditional public-company ecosystem risks becoming lopsided. Capital is channeled into a narrow band of company rather than the broader spectrum of future growth businesses.
It’s easy to see the appeal of the Three AImigos. They are “AI-native” and unlike the Mag7, AI has not been retrofitted into their existing businesses. The opportunity they are addressing is estimated in the SpaceX IPO prospectus at $26.5tn across AI — or equivalent to almost the entire US GDP currently.
This may be fantastical, but their growth rates are virtually unprecedented — Anthropic’s 12 month run-rate revenue has more than tripled in just three and a half months, from $14bn in February to $47bn in late May, when it announced its most recent capital raise.
The great irony is that the Mag7 haven’t simply ridden the AI wave. In fact, many of them have financed the infrastructure, provided the capital and accelerated the technology that now allows the next generation of AI companies to emerge privately at unprecedented scale.
Like Yul Brynner and Steve McQueen at the end of the film, the Mag7 armed the villagers — and now the villagers can flourish on their own. The companies that may challenge their dominance are products of their own success.
Further reading:
— Pay your respects to the Mag7 with some Alphaville swag (Redbubble)
