FAANG is an acronym coined in 2017 by business news commentator Jim Cramer. It highlighted five of the market's strongest tech stocks at the time, many of which continue to outperform to this day. FAANG includes:
- Facebook, which now trades as Meta Platforms
- Apple
- Amazon (AMZN +1.32%)
- Netflix
- Google, which trades under its parent company, Alphabet
But the stock market is a dynamic beast, and companies are constantly finding new ways to create value, especially in the technology sector. As a result, the list of leaders rarely stays the same over the long term.
Introducing the Magnificent 7
The term "Magnificent 7" in this context can be traced back to a research note issued in May by Bank of America analyst Michael Hartnett. It was used to group seven of the top performing stocks in the S&P 500 index this year, and most of those companies are working on one revolutionary technology: artificial intelligence (AI).
Most of Wall Street has now adopted the term "Magnificent 7," and these are the stocks in the group:
- Meta Platforms
- Apple
- Amazon
- Alphabet
- Microsoft (MSFT +0.92%)
- Nvidia
- Tesla
Compared to the FAANG list, Netflix is out and Microsoft, Nvidia, and Tesla are in. The seven companies have a combined market value of $11 trillion. And each of them is convincingly outperforming the S&P 500 index in 2023, which is up 16% year to date.
Nvidia, Meta, and Tesla are doing especially well, rising by triple-digit percentages so far. It has led some analysts on Wall Street to question how much upside could remain in those names for the remainder of this year. But I think two of the Magnificent 7 stocks still have room to run.
Image source: Getty Images.
1. Microsoft
Despite Microsoft's gigantic $2.5 trillion stature, it's proving it can move just like a start-up this year as it snatches a leadership position in the emerging artificial intelligence industry. In the space of just a few months, Microsoft increased its stake in ChatGPT developer OpenAI and integrated the chatbot into its Bing search engine, Office 365 document suite, and Azure cloud services platform.
Clearly, Microsoft is tackling AI from multiple fronts. It wants to transform the internet search industry with ChatGPT, because the chatbot has the ability to directly answer complex questions as opposed to traditional search engines, which require the user to find the information from a list of web results. Bing has the potential to disrupt the search segment of the digital advertising industry, which is worth a sizable $200 billion per year.
Microsoft appears dead right about this shift, because even Google -- the largest search engine in the industry with a 92% global market share -- is developing its own chatbot called Bard.
NASDAQ: MSFT
Key Data Points
But OpenAI's integration with Azure might become Microsoft's real breadwinner over time. The cloud platform's business customers now have access to GPT-4, which is the most advanced generative AI technology available in a commercial setting. It's capable of writing computer code and recognizing images, paving the way for significant productivity gains within even the smallest organizations.
Cathie Wood's Ark Investment Management believes generative AI tools like ChatGPT could generate $14 trillion in revenue by 2030, and Azure will be one of the key distributors. Considering Microsoft will likely bring in just $211 billion in total revenue in fiscal 2023, AI paves the way for significant potential growth in the long run.
Microsoft has generated $9.22 in earnings per share over the last four quarters, and based on a current stock price of $338, it's valued at a price-to-earnings (P/E) ratio of closer to 37. That's a slight premium to the 31 P/E ratio of the Nasdaq-100 technology index, but it's far cheaper than other Magnificent 7 stocks like Nvidia (P/E of 220) and Tesla (P/E of 77).
Considering its leadership position in AI, Microsoft stock might look like a bargain at this price when looking back a few years from now.
2. Amazon
Amazon is another Magnificent 7 stock with enormous potential in AI, especially considering it's home to the largest cloud platform in the world, Amazon Web Services (AWS). The company is also the largest player in e-commerce globally, and it has a dominant presence in digital advertising, streaming, and even robotics -- all of which utilize the power of AI in unique ways.
In the company's first-quarter 2023 earnings call (for the period ended March 31), Amazon CEO Andy Jassy highlighted plans to build all of its segments on top of large language models (like ChatGPT). When it comes to the way consumers interact with Amazon.com, AI will transform the customer experience by delivering more accurate product recommendations, and more relevant advertisements.
Plus, the company continues to automate its e-commerce fulfillment centers with the deployment of 520,000 AI-powered robots, which are capable of picking and packing orders with 2.5 times greater efficiency than humans.
NASDAQ: AMZN
Key Data Points
But, like Microsoft, Amazon's greatest AI opportunity might come via the cloud. AWS is one of Nvidia's oldest data center customers, and the two companies recently signed a new deal that will help businesses scale from 10,000 H100 graphics chips (GPUs) to 20,000 on the new AWS EC2 P5 infrastructure. This will give those businesses access to supercomputer-like performance, enabling them to develop more advanced AI models than ever before.
AWS is also on a mission to train as many enterprises as possible -- small and large -- on the benefits of AI. It recently launched the AWS Generative AI innovation Center, equipped with $100 million in funding to teach customers how to use the cloud platform's most powerful tools. Businesses can connect with AWS engineers, strategists, and data scientists free of charge, who will help them design and deploy AI to supercharge their operations.
That relatively small investment could pay off handsomely in the long run, particularly if keeps emerging businesses away from competitors like Azure.
Amazon might be the most attractively valued member of the Magnificent 7. Its profitability tends to be volatile, so the price-to-sales (P/S) ratio is a better measure to watch. The company has generated $524 billion in trailing-12-month revenue, which is more than any other company in the group, yet it trades at a P/S ratio of just 2.5.
By comparison, Microsoft trades at a P/S multiple of 12 and Nvidia trades at 41. What's more, Amazon stock is still 29% below its all-time high, though it probably won't be for much longer as its AI initiatives ramp up. That spells opportunity for investors.
