As earnings season draws to a close, you might be wondering which stocks are worth doubling down on, or where you can find the most enticing growth prospects. Many on Wall Street have been sounding an alert for a new tech bull market thanks in large part to artificial intelligence (AI).
The biggest technology companies in the world by market capitalization are collectively referred to as the "Magnificent Seven": Apple, Nvidia, Tesla, Amazon, (AMZN +3.47%), Microsoft (MSFT +2.11%), Alphabet (GOOG +1.44%)(GOOGL +1.71%), and Meta Platforms (META +2.48%). After digesting the most recent earnings reports for each, I believe that four of them look too good to pass up.
Let's see why Microsoft, Alphabet, Amazon, and Meta not only look like great buys at the moment, but also are laying the groundwork for durable success. For long-term investors, these four AI leaders might just help someone reach millionaire status.
NASDAQ: MSFT
Key Data Points
1. Microsoft
Microsoft is best known for its Windows operating system and suite of productivity tools including Excel, PowerPoint, and Word. However, for the past several years, the company has been gaining momentum in cloud computing, spearheaded by its platform Azure.
Earlier this year, Microsoft invested $10 billion in OpenAI and its flagship product ChatGPT. Over the last few months, Microsoft has started rolling out new features powered by OpenAI. In its most recent earnings report, the company reported 29% annual growth in Azure, with 3 percentage points of this growth driven by AI.
For several months, the company has been preparing a new product, 365 Copilot, an AI-powered assistant using large language models and generative AI to integrate with Microsoft's various tools including search, cloud, and productivity applications. The commercial release is currently underway, with some on Wall Street thinking it could be a $100 billion opportunity for Microsoft.
2. Alphabet
Following Microsoft's investment in OpenAI earlier this year, Alphabet quickly followed suit with a partnership with a rival start-up called Anthropic. For the last couple of quarters, Alphabet has been showing investors how its integrating AI into its core products, including advertising, cloud computing, and productivity tools.
Advertising is the company's largest revenue and profit contributor. But its ad business was one of the bigger investor concerns for most of 2022, largely due to competing services like TikTok and Instagram.
Growth was shrinking in advertising -- particularly on its video-sharing platform YouTube -- which was having a material effect on profitability, leaving some to wonder if the company's best days were behind it.
But the last couple of quarters have contained a lot of bright spots. Advertising growth has started to rebound, which management attributes to inroads made with generative AI and how it's becoming a core pillar of advertising tools. Ad spending can be cyclical, so it is crucial that Alphabet shows its customers that it has the best capabilities in targeting ads to a specific demographic.
One of the more encouraging points in the third-quarter earnings report was the growth in operating income for its services business, which is primarily made up of advertising. For the quarter, ended Sept. 30, operating margin for services was 35% -- an improvement from the prior year's 31%.
The improving financial and operational picture at Alphabet is reason enough to be bullish. And given how early the company is in its AI deployment, the long-term prospects only make the story even more compelling.
Image Source: Getty Images
3. Amazon
Like Alphabet, Amazon has built a business that gives investors exposure to many different industries.
Amazon is best known for its e-commerce platform, but the company is the undisputed leader in cloud computing and has quietly built a budding advertising business. The biggest takeaway from its third-quarter report was that, as of now, the cloud business effectively has a $100 billion revenue run-rate.
But management says the overwhelming bulk of enterprise IT spending is still captured by on-premise products. This means that as cloud applications become even more crucial for enterprises of all sizes, Amazon is in position to benefit from this shift in IT budgets.
And like Alphabet, Amazon also is a big investor in Anthropic. As part of the deal, Anthropic will train future generative-AI models on Amazon's homegrown semiconductor chips and will use Amazon as its primary cloud provider. I think investors are discounting the benefits of this partnership and the opportunity for lead generation that Anthropic represents.
Amazon's advertising business is also exciting. The company is leveraging AI to hone its ability to run targeted ad campaigns. As the holiday season approaches, these investments could be a bellwether for the e-commerce operation.
4. Meta Platforms
Meta is home to social media applications Facebook, Instagram, and WhatsApp. For much of 2022 and early 2023, Meta Platforms was under a lot of scrutiny after the company's core advertising business took a back seat to management's interest in the metaverse.
Meta mistakenly allocated too many resources to its metaverse ambitions and lost sight of its core moneymaker. As growth in the advertising business stalled and expenses ballooned, profitability took a hit. Meta resorted to multiple rounds of layoffs to get costs under control as it sought to get its advertising revenue back on track.
The third-quarter earnings report underscored how much progress Meta has made. Advertising revenue had its highest growth rate all year, and free cash flow is at levels not seen since 2021.
Macroeconomic conditions might make some investors question the near-term outlook. This is a valid concern, but the analysis in the section below shows why investors should think about the long term.
Can these magnificent four make you a millionaire?
Data source: YCharts.
The chart above illustrates the total return on a $50,000 investment in each of the four stocks over 10 years. Total return is an important metric for stocks because it accounts for dividend reinvestment. Microsoft is the only one of the Magnificent Seven that pays a dividend, and this is one reason its return has outpaced the other three in this group.
If you're considering the stocks outlined above, a good strategy would be to dollar-cost average into each of them, as long as the core investment thesis remains intact.
With each of these stocks trading for just a few hundred dollars, you can open positions in each for about $1,000. By doubling down on your winners over the long haul, the power of compounding will take effect, and you should see a meaningful return that just might make you a millionaire.
