There's no hotter topic in technology today than artificial intelligence (AI). Breakthroughs from ChatGPT and competing platforms have captivated both tech enthusiasts and investors. But with so many companies trying to make waves in the AI realm, investors can become exhausted trying to identify the most compelling opportunities.
The "Magnificent Seven" stocks -- Amazon (AMZN 0.75%), Microsoft (MSFT -1.00%), Meta Platforms (META -2.41%), Alphabet, Apple, Tesla, and Nvidia -- are the usual suspects in the AI spotlight. Below, I'll break down the three megacap tech behemoths I think are the strongest buys right now.
1. Microsoft
Microsoft kicked off the AI revolution with its multibillion-dollar investment in OpenAI in early 2023. OpenAI is the start-up behind the wildly successful AI application ChatGPT.
Over the past year, Microsoft has swiftly integrated ChatGPT throughout its Windows operating system. The technology has helped spear gains in the company's Azure cloud computing platform, as well as Microsoft's developer product GitHub.
The investment in OpenAI appears to be paying off in spades. It's no wonder that top tech analyst Dan Ives of Wedbush Securities has proclaimed that Microsoft's "iPhone moment" has arrived.
The integration of ChatGPT into Microsoft's ecosystem represents something bigger than just new revenue opportunities. Microsoft has transformed from a personal computing empire to a leader in cloud computing and is now evolving into a full-blown AI powerhouse.
At a forward price-to-earnings (P/E) ratio of about 36, Microsoft stock isn't exactly cheap. The forward P/E of the S&P 500 is just under 21. However, the company's robust cash-flow machine and diversified business model is hard to pass over -- especially when it comes to the Magnificent Seven.
Microsoft is a top investing opportunity as the AI narrative continues to play out. Now is a great time to begin using dollar-cost averaging to add to an existing position or initiate a new one. Prepare to hold for the long term.
Image source: Getty Images.
2. Amazon
Although Microsoft's partnership with OpenAI was the talk of the town for a while, e-commerce and cloud computing specialist Amazon made a splash of its own -- investing $4 billion in a competing platform called Anthropic. Per the terms of the deal, Anthropic will be using Amazon as its primary cloud provider.
Moreover, the AI start-up will also be leveraging Amazon's in-house Trainium and Inferentia chips to train future generative AI models. The relationship with Anthropic should serve as a bellwether to accelerate growth -- particularly in the cloud computing arena.
With Amazon's $36.8 billion in trailing-12-month free cash flow and $86 billion of cash and equivalents on the balance sheet, it's no wonder that both Cathie Wood and Warren Buffett own the stock. The company has a tremendous level of financial flexibility and is in a unique position to invest in many areas across the AI realm.
Trading at a price-to-sales (P/S) ratio of just 3.4, Amazon stock looks attractive, compared to historical valuation levels. Moreover, it's the lowest-valued stock in the Magnificent Seven, based on this metric. Currently, there's an incredible opportunity to scoop up shares in Amazon as its breakthroughs in AI continue to unfold.
AMZN PS Ratio data by YCharts.
3. Meta Platforms
The last Magnificent Seven company I'll be exploring is social media juggernaut Meta Platforms, which dominates the social media realm through its ownership of Facebook, Instagram, and WhatsApp. Moreover, the company is also making inroads in gaming through its popular virtual reality (VR) business Meta Quest.
2023 was a key year for Meta. The company spent much of it using a series of layoffs to right-size its expense profile and shift its focus to accelerated profit margins. While Meta grew its top line by 16% last year, its operating income soared by 62%. The newfound margin expansion flowed directly to the bottom line, as net income increased 69% year over year.
With $43 billion of free cash flow, Meta has found no shortage of ways to reinvest in the business. The company increased its share-buyback program by $50 billion and announced a quarterly dividend.
On top of that, Meta is making impressive inroads in the AI space. The company is building its own chips to compete with industry titan Nvidia. Moreover, by combining these chips with its existing library of data from its various social media platforms, Meta is uniquely positioned to ignite a new phase of growth for its core advertising operation.
Although its price-to-earnings (P/E) ratio of 34.3 is a bit pricey compared to peers, I see the premium as warranted. Meta is a cash machine and has found ways to reward shareholders while also aggressively pursuing AI, the next frontier in technology at large.
There's currently a lucrative opportunity to scoop up shares in Meta and benefit from the passive-income opportunity from the dividend, while also keeping a close eye on the company's further progress in AI.
