Back in 2023, a Bank of America analyst named Michael Hartnett coined a new phrase to describe a group of leading tech companies that were driving the action in the U.S. stock market: the "Magnificent Seven." The group's components are:
- Nvidia
- Apple
- Microsoft
- Alphabet
- Amazon
- Meta Platforms (META 0.97%)
- Tesla
Those are seven of the 10 largest companies in the world, so understanding how this cohort is trading can help retail investors judge the overall health of the market.
Due to the momentum of the artificial intelligence (AI) segment this year, some of these stocks have gotten a bit pricey, but one still looks relatively cheap, and I think it could be a great buying opportunity.
Image source: Getty Images.
Some high-growth names may be cheaper than they look
Because several of these companies are growing at high rates, trailing earnings metrics don't fully do them justice. A better way to gauge their values is the one-year forward price-to-earnings estimate, which is based on analysts' earnings projections. This isn't a perfect method, but it offers investors an idea of how the company is valued relative to a reasonable forecast of its future financial situation.
If we remove Tesla from the chart (it's trading for a pricey multiple of about 180 times next year's earnings, which compressed the data for the rest of the chart), it reveals some interesting information.
NVDA PE Ratio (Forward 1y) data by YCharts.
The first takeaway from this chart is that -- contrary to what some investors would expect -- Nvidia, the world's biggest company by market cap, isn't the most expensive stock in the cohort. It's important to understand that Nvidia really isn't trading at that lofty a premium, particularly if it continues to grow at the pace that many analysts think it will.
However, most of these stocks are clustered in the range of 25 to 30 times next year's expected earnings. Those are not historically cheap levels. This has led many investors to conclude that the market is overvalued and ripe for a pullback -- and a correction wouldn't surprise me.
But there's one company among the seven that's trading at a historically reasonable forward valuation: Meta Platforms.
Meta stock has been heavily sold off due to investors' concerns about its data center capital expenditure plans, but is that a valid cause for concern, or has that selloff created a buying opportunity?
Meta Platforms' business looks strong
Meta Platforms hasn't been shy about spending tens of billions of dollars on AI computing capacity. However, it has crossed an important threshold.
The social media giant used to spend only the cash flow it was bringing in on AI infrastructure. Now, it's starting to take on off-balance-sheet debt to fund those efforts. This concerns many investors, which is why it heavily sold off following its Q3 earnings report.
If you look at its results for that period, the business is incredibly strong. Revenue rose 26% year over year, thanks to AI-powered improvements on its platforms. This could result in even more growth over the next few years, which seems to partly justify Meta's massive spending plans.
NASDAQ: META
Key Data Points
However, with market sentiment currently bearish toward Meta, don't be surprised if a further sell-off occurs. The market is growing concerned that its AI strategy will wind up echoing what happened with its grand "metaverse" plans, which saw CEO Mark Zuckerberg sink tens of billions of dollars into a concept that never really took off. Even if that turns out to be the case this time as well, it's worth recognizing that once Meta decided to quit spending as heavily on the metaverse, it turned back into a cash-generating machine. Meta may find itself reiterating that strategy again with AI, but the process could take a few years to play out.
So, if you can patiently hold Meta stock for, say, a five-year period regardless of its short-term fluctuations, I think it could be a market-beating stock to own. But if you cannot stay patient while Meta bets on its AI investments, other stocks may be better picks for you, including Nvidia, which is making money from the AI trend right now.
