A term coined by Bank of America analyst Michael Hartnett, the "Magnificent Seven," refers to the seven heavyweights in the S&P 500 index: Microsoft (MSFT +0.69%), Apple, Alphabet, Amazon, Tesla, Meta Platforms (META 1.31%), and Nvidia. These seven stocks have been pivotal to the U.S. stock market rally in 2023.
While all of these companies have solid competitive advantages, Meta Platforms and Microsoft seem better prepared to emerge as formidable long-term investments, thanks to the strong monetization potential of their artificial intelligence (AI) offerings and rapidly improving financials.
Let's assess why these two stocks can prove to be unstoppable picks for long-term investors.
1. Meta Platforms
After a turbulent 2022, Meta Platforms' stock is now up by nearly 162% so far in 2023. With a current market capitalization close to $811 billion, the stock has to surge by nearly 24% to reenter the coveted $1 trillion market cap club.
However, the company seems quite capable of this achievement, thanks to its multi-pronged growth strategy.
NASDAQ: META
Key Data Points
While the tech behemoth witnessed a slight dip in advertising revenue in 2022, it is now back on the growth trajectory. CEO Mark Zuckerberg's focus on increasing profitability and optimizing costs in areas such as labor, office space, and data center efficiencies has played a pivotal role in boosting Meta's revenue and earnings in recent quarters.
Emarketer expects Meta to account for nearly 75% of social ad dollars and 20% of the total U.S. digital ad spending in 2023. Being this dominant player, Meta is well positioned to benefit from the astounding pace of growth in the digital advertising market (estimated to be worth $1.5 trillion by 2030).
Meta has been working to improve user engagement and monetization of its suite of apps (Facebook, Instagram, WhatsApp, and Messenger) by leveraging AI for enhanced content recommendations and better consumer service. Meta is also leveraging AI technology for automating and cost-optimizing ad creation and for improved ad targeting -- moves that are helping it secure better prices as well as attract new advertisers to its platform, thereby driving overall business growth.
Meta Platforms' growth initiatives are already bearing fruit. In the second quarter (ending June 30), daily active users across all of Meta's suite of applications grew by 7% year over year to 3.07 billion. Facebook alone witnessed a 5% rise to 2.06 billion. Facebook also saw a 7% increase in overall time spent on the platform, thanks to the improved user experience associated with AI-recommended content.
Meta is also striving to turn around its short-form video platform Reels, which has been a major headwind, by improving engagement and monetization. Users played more than 200 billion Reels daily across Facebook and Instagram, while the annual run rate for Reels reached $10 billion at the end of the second quarter -- almost a tenfold increase year over year.
With several formidable growth drivers and robust operating leverage, Meta is poised for impressive performance in the coming years.
2. Microsoft
A laggard of the Magnificent Seven group in terms of year-to-date share price growth, tech titan Microsoft's fundamentals and financials are nothing short of impressive. A leading software player with iconic brands such as Windows, Office, Azure, Bing, and LinkedIn, Microsoft's offerings are deeply embedded into the daily lives of both organizations and consumers.
NASDAQ: MSFT
Key Data Points
The near-term monetization potential of Microsoft's AI innovations, especially in combination with its strength in areas such as cloud computing, search, office productivity, and cybersecurity, bodes extremely well for the company's stock. The strategic $13 billion investment in OpenAI, the brains behind ChatGPT, is playing a pivotal role in enhancing its core products -- making them more efficient as well as cost-effective. While the financial implications of these advancements are yet to be fully realized in quarterly earnings, the future looks promising.
Cloud computing platform Azure accounted for over 50% of the $110 billion-plus in cloud revenue in fiscal 2023 (ended June 30). Further, Wedbush Securities analysts, led by Dan Ives, believe that Microsoft is the current AI leader and can reap significant monetary benefits with Microsoft Copilot (AI assistant) within the Azure cloud computing business.
This seems quite plausible, especially since Microsoft is guiding for Azure revenue to grow by 25% to 26% year over year in constant currency in the first quarter of fiscal 2024, which includes roughly 2 percentage points worth of growth associated with Azure AI services.
Furthermore, Microsoft Copilot for Office 365 (its cloud-based office productivity suite of apps priced for enterprise customers at $30 per user, per month) can add a significant new revenue for Microsoft -- especially considering that the Office 365 suite has more than 345 million paid seats. The company's presence in cybersecurity, especially with its AI-powered Security Copilot, can further prove to be a major growth avenue.
Microsoft's fiscal 2023 financial performance has been quite impressive amid a backdrop of decelerated consumer and IT spending. The company generated free cash flow close to $47 billion in fiscal 2023 and ended the year with total cash of $111.3 billion and $79.4 billion of debt. Hence, considering the many secular tailwinds and the robust financial performance of the company, now might be a good time to buy this stock.
