Meta Platforms (META 1.18%), Microsoft (MSFT 1.33%), and Nvidia (NVDA +1.73%) are knocking on the door of all-time highs, whereas the other four "Magnificent Seven" stocks -- Amazon, Alphabet, Tesla, and Apple -- are down year to date. What gives?
Here's why artificial intelligence (AI) monetization is a key differentiating factor that separates Meta, Microsoft, and Nvidia from the rest of the pack -- and why all three growth stocks could still have further room to run.
Image source: Getty Images.
The AI difference
Meta, Microsoft, and Nvidia benefit from AI in a variety of ways. These benefits could be the primary reason for the strong performance of all three stocks relative to the S&P 500 year to date.
Meta uses AI to improve its algorithm, keeping users engaged and connecting advertisers with potential buyers. The longer users stay on Meta's Family of Apps (Instagram, Facebook, WhatsApp, and Threads), the more attractive those platforms become for advertisers.
Meta is expanding its AI investments by pouring capital expenditures into other AI endeavors, like the Meta AI App. Launched on April 29, the app is built with the latest version of Meta's large language model, Llama 4. The app offers a personalized AI experience designed around voice conversation.
Microsoft has integrated AI across its Microsoft 365 suite (Word, Excel, PowerPoint, Outlook, etc.) through an AI feature called Copilot, GitHub Copilot for developers, Azure AI services for cloud computing, and more. AI presents arguably the most impactful product upgrade in years for Microsoft's legacy software suite and Intelligent Cloud platform.
Nvidia makes graphics processing units (GPUs), which are the workhorses that power data centers. More computing power will be needed to support growing AI adoption and the increasing complexity of AI models. Nvidia is the undisputed leader in providing a full stack of AI computing solutions that includes hardware (GPUs), software, and other cloud-based solutions.
Meanwhile, Nvidia AI software tools like CUDA and TensorRT help developers use Nvidia GPUs for everything from general-purpose computing tasks to training deep learning models.
Runway for future earnings growth
The market hates uncertainty, but it also loves companies with a clear vision for growing revenue and converting capital expenditures into free cash flow. Meta, Microsoft, and Nvidia all have multiple ways to grow earnings.
Meta has steadily increased its advertising revenue and profitability over time, largely thanks to Instagram's innovations in short-form videos through Reels. Regardless of the success of the Meta AI app or Meta's other projects in augmented and virtual reality (like Meta Quest), the company could still generate solid growth from its Family of Apps alone.
Microsoft is in a similar boat. It benefits from AI, but it isn't a pure-play AI company. Microsoft generates a ton of cash that it can funnel directly into long-term growth projects, while still having plenty of dry powder to manage its operating expenses and return cash to shareholders through buybacks and dividends.
Nvidia has transformed its business from relying largely on gaming, professional visualization, cryptocurrency, and other end markets to being a majority of data center-focused business. This concentration makes Nvidia more of a pure-play AI name than Meta and Microsoft, which comes with higher risk and higher potential reward.
What's more, Nvidia's sky-high operating margins have helped the company convert a substantial amount of revenue into profit. But competition or a slowdown in AI spending may lead to margin erosion over time. Even if that happens, the company could still grow earnings at a steady rate -- just not at the pace investors have grown accustomed to in recent years.
Reasonable valuations
Despite outperforming the S&P 500 and their Magnificent Seven peers so far this year, Meta, Microsoft, and Nvidia all sport surprisingly reasonable valuations.
TSLA PE Ratio (Forward) data by YCharts
Except for Tesla on the high end and Alphabet on the low end, most of the Magnificent Seven have forward price-to-earnings ratios in the mid-20s to the mid-30s. This is far from value territory, but it is also not expensive, given how far these stocks have climbed in recent years.
As mentioned, Meta, Microsoft, and Nvidia's high margins are a big reason to be optimistic about their future earnings growth. And, to no surprise, these three companies have the highest profit margins of the Magnificent Seven.
NVDA Profit Margin data by YCharts
Nvidia's 51.7% profit margin means that it converts over half of every dollar in sales into pure net income. That level of profitability is almost unheard of, especially for a majority hardware company. It also provides a cushion by which Nvidia's margins could come down and it would still be a phenomenal business.
Granted, it's important to note that profit margin is not an apples-to-apples comparison. Amazon's profit margin looks low because of its high-volume but low-margin e-commerce business. Amazon Web Services makes up a fraction of Amazon's total sales, but it contributes the majority of its operating income because it is such a high-margin segment. Similarly, Tesla's primary business is manufacturing cars -- a traditionally low-margin business.
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Three stocks that could continue outperforming the S&P 500
Meta, Microsoft, and Nvidia stand out as long-term winners due to their established and industry-leading high-margin business models, upside potential from AI, and reasonable valuations. However, these stocks are not cheap.
A growth slowdown could make any of these stocks appear more expensive in the near term. So it's best to only approach these names if you have at least a three- to five-year investment time horizon.
