The term "Magnificent Seven" is used to describe Alphabet, Amazon (AMZN 0.81%), Apple (AAPL 5.98%), Meta Platforms, Microsoft (MSFT 2.22%), Nvidia (NVDA 3.46%), and Tesla. They are the seven most valuable companies in the Nasdaq Composite (as of Nov. 24), and to say they've had a good year would be an understatement by most measures.
Nvidia has had quite a year. Its stock is up more than 225% this year, far outperforming the Nasdaq Composite's roughly 36% gains. Most of this can be attributed to AI-related hype and how Nvidia fits in the value chain as a market leader in graphics processing units (GPUs) and other technologies.
Despite the attention Nvidia has received this year and the gains its stock has seen, I believe there are three better buys in the Magnificent Seven for long-term investors. Microsoft, Apple, and Amazon all provide a better long-term value proposition than Nvidia because of their diversified (and proven) business models.
1. Microsoft
Few businesses in any sector have a business as diverse as Microsoft. Although it categorizes its businesses into three broad segments, there are plenty of valuable products and services within them:
- Productivity and Business Processes: Office products (Word, Excel, PowerPoint), LinkedIn, and Dynamics 365.
- Intelligent Cloud: Azure, enterprise services, and server products.
- Personal Computing: Xbox, Windows, search advertisement.
One aspect of Microsoft's diverse business that provides a leg up is that many of Microsoft's customers are other businesses. Services like Office products, LinkedIn, and Azure are also available to consumers, but businesses are the ones padding Microsoft's top line.
I shy away from using the term recession-proof, but Microsoft is as recession-resistant as any big tech stock. It has steady demand from the enterprise sector, which is typically more stable than consumer-driven markets when economic conditions aren't the best.
2. Apple
Apple's business is still heavily reliant on the iPhone's success, but it has diversified a lot recently with the growth of its services. Still, the power of having more than a billion phones in people's hands across the world can't be overstated.
Apple is known for its world-class hardware, but its ecosystem seems to be coming to life as it leverages its reach to break new ground in industries like healthcare and finance. Convenience sells, and that's exactly what you get with Apple's ecosystem. Think about ApplePay and the number of health tests that can be accurately run from an Apple Watch.
Expanding and operating in various service-based industries should boost its market position and create additional long-term revenue streams. With more than $383 billion in revenue (albeit down 3% year over year) and just under $30 billion in cash and cash equivalents, Apple is the furthest from financial problems, but adding more subscription-based revenue will provide consistent income to complement the cyclical nature of hardware.
It's hard to bet against the most valuable public company in the world.
3. Amazon
Amazon certainly became a household name because of its e-commerce business, but its operations expand far past that. Its cloud platform, Amazon Web Services (AWS), was only 16% of its third-quarter 2023 revenue but 62.5% of its operating income. AWS is Amazon's true profit-maker, but e-commerce and advertising will contribute a lot to overall business growth.
Advertising is an underrated business for Amazon, but it's the company's fastest-growing segment, growing revenue by 25% year over year. With the growth of Prime Video (thank you, NFL), Amazon has a chance to offer innovative advertising opportunities to a broad range of businesses.
Amazon's recent move from a national fulfillment network to eight regional networks has improved efficiency, but it's also given Amazon a chance to offer comprehensive supply chain services to businesses. In October 2023, Amazon released Supply Chain by Amazon, which provides a full range of services from picking up from manufacturers, to storing, and to transporting overseas.
Using its expansive logistics network to earn money beyond its own e-commerce operations should let Amazon benefit from overall industry growth for some time.
You can't ignore their valuations
None of these four companies are undervalued by most standards, but Nvidia's 2023 stock-price surge has inched the stock into overvalued territory.
MSFT PE Ratio (Forward) data by YCharts.
Nvidia's high forward price-to-earnings (P/E) ratio makes it susceptible to increased market volatility or a market correction. That's not to say Microsoft, Apple, or Amazon aren't, but a lot of Nvidia's valuation is riding on a more niche business model.
AI-related demand should boost Nvidia's future earnings, but any signs of disappointment could cause investors to jump ship fairly quickly. Microsoft, Apple, and Amazon are all but guaranteed to be stable investments for the long haul.
