Magnificent Seven Will Have Big 2024 R&D Expenditures

When it comes to the famed “Magnificent Seven,” market participants typically focus on their earnings growth, share price performance, and stock valuations. However, research and development (R&D) should not be overlooked.

In what’s already proven to be a long-term assist to ETFs like the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), Magnificent Seven members are among leaders in R&D spending and in turning those expenditures into tangible benefits on the shareholder outcome front. Indeed, there is considerable value in R&D.

“What do organizations expect to get in return? At the core, they hope their R&D investments yield the critical technology from which they can develop new products, services, and business models. But for R&D to deliver genuine value, its role must be woven centrally into the organization’s mission,” according to McKinsey. “R&D should help to both deliver and shape corporate strategy, so that it develops differentiated offerings for the company’s priority markets and reveals strategic options, highlighting promising ways to reposition the business through new platforms and disruptive breakthroughs.”

QQQ Primed for More R&D Leadership

The Magnificent Seven’s devotion to — and largely impressive execution of — R&D is pertinent to investors considering QQQ and QQQM. That’s because those stocks combine for about 40% of the ETFs’ rosters. Data confirms the potential allure of those companies’ R&D proclivities as they spend significantly more on such pursuits than other members of the S&P 500.

“Another way to frame it: the Magnificent 7 reinvests 61% of their operating free cash flow back into capex + R&D … that’s tracking to be 3x the 493″ of the S&P 500,” noted Tony Pasquariello, head of hedge fund coverage at Goldman Sachs.

Pasquariello observed that R&D is a form of redeployment of capital. That means that cash isn’t funneled directly back to investors in the form of shareholder rewards. But those efforts can pay long-term dividends by bolstering the economic moats and strong balance sheets of Magnificent Seven members.

Speaking of shareholder rewards, Goldman’s Pasquariello observed that that cohort is dominant regarding return of capital. That can include buybacks and dividends. Just look at Alphabet (GOOG) and Facebook parent Meta Platforms (META). Each of those recently became dividend payers. Add to that Microsoft (MSFT) and Apple (AAPL). Those are the two largest holdings in QQQ and QQQM. They have have established track records of payout growth along with penchants for massive share repurchases.

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