The Nasdaq-100 is made up of 100 of the largest nonfinancial companies listed on the Nasdaq stock exchange. It has delivered a return of 343% over the past decade, doubling the gain of the more diversified S&P 500 thanks to its high concentration of the world's largest tech stocks.
But the Nasdaq-100 can also be more volatile during times of uncertainty, and it's currently in correction territory after a 13% decline from its recent peak. Some of the largest constituents in the index, namely the "Magnificent Seven," are leading the decline. This group of seven companies earned their nickname for their tendency to outperform the broader market (notwithstanding the occasional rough patch) and their incredible size. Here they are, along with their recent market caps:
- Apple: $3.1 trillion.
- Microsoft: $2.8 trillion.
- Nvidia: $2.8 trillion.
- Amazon : $2.1 trillion.
- Alphabet (GOOGL 0.41%)(GOOG 0.21%): $2 trillion.
- Meta Platforms (META +0.22%): $1.5 trillion.
- Tesla: $770 billion.
I want to focus on two of these stocks because of their attractive valuations relative to the rest of the group, and their potential to capitalize on emerging themes like artificial intelligence (AI). Shares of Meta Platforms and Alphabet are down 19% and 21%, respectively, from their record highs, and here's why investors might regret not buying them on the dip.
1. The case for Meta Platforms
Meta Platforms is the parent company of the Facebook, Instagram, and WhatsApp social networks, which serve over 3.3 billion people every day. The company generates revenue by selling advertising slots to businesses, so the more ads it can show each day, the more money it makes.
Since almost half the world's population already uses Meta's apps, attracting new sign-ups is becoming harder, so the company is focusing on engagement instead. It's using AI in its recommendation engines to learn what type of content users like to see, so it can show them more of it to keep them online for longer.
Toward the end of 2024, CEO Mark Zuckerberg said this strategy drove an 8% increase year over year in the amount of time users spent on Facebook, and a 6% increase for Instagram.
NASDAQ: META
Key Data Points
Introducing new products is also part of management's engagement tool kit. The company launched an AI chatbot called Meta AI last year that is accessible through all of its existing apps.
Users can ask it questions on a variety of topics, or invite it into their group chats to settle debates and recommend fun activities. Meta AI had over 700 million monthly active users at the end of last year, which makes it one of the most popular chatbots in the world.
It is powered by the company's Llama family of large language models (LLMs). They are open-source and have attracted over 600 million downloads, which allows the company to lean on an enormous community of developers to fix bugs and improve the models far more quickly. Thanks to this approach, these models have become some of the most powerful in the industry.
Zuckerberg thinks the upcoming Llama 4 version will actually outperform some of the best closed-source models from developers like OpenAI. If that's true, Meta AI could become one of the industry's "smartest" chatbots, which could attract new users and create more opportunities to generate revenue.
Meta generated a record $164.5 billion in revenue last year, up 22% compared to 2023. Its earnings per share (EPS) soared by 60% to $23.86. That places its stock at a price-to-earnings ratio (P/E) of 24.7, making it the second-cheapest Magnificent Seven stock; only Alphabet is cheaper.
Based on the company's robust financial growth and its leadership potential in AI, the recent 19% dip in its stock price presents a great long-term buying opportunity for investors.
Image source: Alphabet.
2. The case for Alphabet
Alphabet is the parent company of Google, YouTube, and the self-driving car developer Waymo. Google generates more than half of the conglomerate's total revenue, led by its search engine, which sells advertising slots to businesses.
AI chatbots have threatened the dominance of Google Search over the last couple of years, because they provide internet users with a convenient new way to access information. Alphabet is investing heavily in AI to ensure Google maintains its 90% market share in search. It launched AI Overviews last year, which appear at the top of the traditional Google Search results when users type in a query.
They combine text, images, and links to third-party websites to provide a holistic, AI-generated response, which can save users from sifting through web pages to find the information they need.
Alphabet says Overviews monetize just as well as the traditional search format, so they shouldn't hurt Google's ability to generate revenue. In fact, the company says users are searching more frequently thanks to Overviews, because they can refine their questions and extract more intricate information than before.
Overviews are powered by Alphabet's Gemini family of LLMs, which the company developed in-house to rival the impressive models from start-ups like OpenAI and Anthropic. Not only is Gemini playing a crucial role in improving Google Search, but it also powers a stand-alone chatbot of the same name, and an AI assistant that is embedded in Google Workspace apps like Gmail, Docs, and Sheets.
NASDAQ: GOOGL
Key Data Points
Lastly, Google Cloud deserves a special mention because it's the fastest growing segment of Alphabet's entire business. It has become a go-to destination for businesses and developers seeking state-of-the-art data center computing capacity, and LLMs (including Gemini), which they use to create their own AI software.
In the final quarter of 2024, Google Cloud customers were using eight times the amount of computing capacity for AI training and AI inference workloads than they were 18 months earlier. Google Cloud's AI developer platform, Vertex AI, experienced a fivefold increase in customers last year overall.
Simply put, Alphabet's various AI efforts are generating a significant amount of momentum, which doesn't quite line up with the recent 21% drop in its stock price. Normally, when a company's fundamentals are improving but its stock is moving lower, that spells a buying opportunity for investors.
The company grew its EPS by 38% during 2024 to a record $8.04, and as displayed in the chart I shared earlier, that places its stock at a P/E ratio of just 20.2. Not only is it the cheapest Magnificent Seven stock by far, but it's also 32% cheaper than the Nasdaq-100 index overall, which is trading at a P/E of 29.8.
Alphabet is still facing some regulatory headwinds, but the recent dip in its stock could make it a fantastic long-term buy nonetheless.
