Investing doesn't always have to be about finding the next big thing. Sometimes, buying and holding what's already a great business is the better option in the technology space. Some companies dominate technology and have the size and deep pockets to protect their interests from competition.
These megacap tech stocks, known as the "Magnificent Seven" stocks, have turned individual investors into millionaires.
Can that continue? Absolutely.
However, not every Magnificent Seven stock is a table-pounding buy today.
Here are the three that are:
1. Nvidia: AI chip dominance spells a bright future
Nvidia (NVDA 6.18%) has become the face of the artificial intelligence (AI) industry. The reason? It became the go-to AI chip company, enjoying a market share between 80% and 90% today. That's launched the stock upward by a blistering 500% since the start of 2023. Today, Nvidia's $2.1 trillion market cap makes it one of the largest corporations on the planet. So, how can the party keep going? Believe it or not, Nvidia still has millionaire-making potential over the long term.
Companies worldwide are implementing AI into their products and services. AI is certainly no fluke. The more AI spreads, the higher the demand for powerful data centers to power it. Nvidia's CEO believes there is a need for over a trillion dollars in additional data center spending over the coming years. CEO Lisa Su of Advanced Micro Devices, Nvidia's chief rival, believes the AI chip market will grow to $400 billion.
If you annualized Nvidia's fourth-quarter data center revenue, the resulting $72 billion is a fraction of the potential market. Even if competition eats away at Nvidia's market share, it's hard to see a collapse. Suppose market share falls to 50%. Half of a $400 billion market is still three times Nvidia's annualized Q4 data center revenue. In other words, Nvidia's AI growth trend could continue for a while.
Numbers-wise, analysts believe Nvidia will grow earnings by an average of 30% annually over the next three to five years. The stock trades at a forward price-to-earnings (P/E) multiple of 37 today, arguably cheap for a company with such high expected growth.
2. Meta Platforms: The social media giant with room to run
Under Co-Founder and CEO Mark Zuckerberg, Meta Platforms (META 0.43%) has become the king of social media. Today, nearly 4 billion people use any one of Meta's four apps: Facebook, Instagram, Threads, and WhatsApp each month. A social media company doesn't jump out as an AI stock, but Meta is very much one. The company makes its money by advertising to its billions of users.
AI is behind the scenes, choosing which content to show users to maximize their time and engagement on the app. It's helping advertisers craft compelling ads and finding the best users to show them to. Zuckerberg is also passionate about Reality Labs, an AI and metaverse business unit investing billions of dollars in research and development of augmented reality hardware and other technologies.
Meta's user base grew by 6% in 2023, an impressive feat considering it grew from such a large base. This shows how good Meta Platforms is at social media, and it could grow even more potent if the United States takes action to ban TikTok because of owner ByteDance's ties to the Chinese Communist Party. Meta is a cash cow repurchasing shares and has just started paying investors dividends.
Meanwhile, shares trade at a forward P/E of 24, an attractive price tag for a business that experts believe can grow earnings by 20% annually for the next three to five years. Shareholders are poised to enjoy billions of dollars raining down on them for dividends and repurchases, making Meta a potentially potent millionaire-maker.
3. Alphabet: Don't count this stock out when it comes to AI
Alphabet (GOOG 9.96%) (GOOGL 10.22%) has dominated internet search for two decades. The company maintains a roughly 90% share of global searches, making Google the world's most trafficked website. Second place? Video search platform YouTube, owned by ... you guessed it, Alphabet. The two sites create lucrative advertising opportunities, the golden goose that Alphabet has ridden to a trillion-dollar market cap.
There is some fear that ChatGPT and other AI chatbots could disrupt Google Search and cripple Alphabet's lucrative empire. However, don't rush to count Alphabet out. The company has launched AI tools of its own, and Google benefits from 20 years of brand power. Google is synonymous with internet search, and that won't be easy to change overnight.
Remember that Alphabet is still one of the most influential companies on Earth. It generates $70 billion in free cash flow annually, more than most companies do in sales. It's not impossible, but breaching Alphabet's moat won't be easy.
Today, shares trade at a forward P/E of 21, while analysts expect 16% annualized earnings growth over the next three to five years. That makes Alphabet a potential bargain if it can ward off the pressure from ChatGPT and other rivals.
