The "Magnificent Seven" is a group of companies that led the market since 2023:
- Microsoft (MSFT 0.58%)
- Nvidia (NVDA 1.26%)
- Apple (AAPL 1.64%)
- Alphabet (GOOG 3.02%) (GOOGL 3.24%)
- Amazon (AMZN 2.77%)
- Meta Platforms (META 1.95%)
- Tesla (TSLA 3.85%)
Other than Tesla, which is basically flat year to date, this group is having a fairly strong 2024.
Nvidia outshines them all, continuing its unbelievable run after a phenomenal 2023. But investors who didn't buy in earlier can't do anything about that now; they can only look forward. So which Magnificent Seven stock looks likeliest to be the biggest winner for the rest of the year?
Many of the Magnificent Seven trade at sky-high valuations
Let's start with the stocks that likely won't have the best performances in the second half. While Tesla shares underperformed for most of the year, there were good reasons for that. Demand for its electric vehicles declined and its margins have shrunk due to its price cuts. There are no signs those trends will turn around before 2024 is over.
Next, let's consider valuations: Nvidia, Microsoft, Apple, and Amazon all trade at expensive levels of 34 times forward earnings or more, which is quite a premium over the benchmark S&P 500 index, which currently averages 22.7 times forward earnings. Those premiums will likely inhibit their performance from here.
That leaves just Alphabet and Meta Platforms. Of the two, I think Alphabet is primed for the best second half of 2024.
Alphabet's investments are starting to pay off
Alphabet has long been a force in artificial intelligence (AI). However, it appeared caught off guard when the generative AI craze took off in late 2022. As a result, it had to scramble to launch competing products that weren't great initially. However, it has largely cleaned up their problems.
Now, Alphabet's generative AI model, Gemini, is recognized as one of the top options available, and has already been integrated into several of its products to perform tasks such as summarizing Google search results.
Furthermore, Google Cloud is seeing strong momentum. Because most companies can't afford to spend millions of dollars to build and operate their own supercomputers to train AI models, renting that processing power from a cloud computing provider is far more economical. Each cloud infrastructure provider has its specialties, and AI appears to be one of Google Cloud's. With 60% of funded generative AI start-ups and 90% of generative AI unicorns (private companies worth at least $1 billion) using its services, it has a strong foothold in this emerging market.
Lastly, Alphabet's advertising business should continue to perform well this year -- and while AI may be flashy, advertising is what keeps the company's lights on. In Q1, more than three-fourths of its revenue came from advertising-related sources, and that revenue was up 13% year over year. While that's not blazing-fast growth, it is impressive for a fairly mature business. With upcoming catalysts like election-related advertising, we can expect a strong end to 2024 for Alphabet.
As for its valuation, Alphabet is actually the cheapest of the Magnificent Seven cohort, trading at 25 times forward earnings.
GOOGL PE Ratio (Forward) data by YCharts.
While that's not cheap relative to the broader market, it is when compared to its peers.
Based on the combination of its relatively cheap valuation and its strong business momentum, I have confidence that Alphabet will have a strong close to 2024. Whether it will outperform the rest of the Magnificent Seven is still up in the air -- especially with a wild card like Nvidia in the mix -- but I'm confident that Alphabet will beat the market in the second half.
