1. Top Stock Picks: “Magnificent Seven” Companies Worth Investing in Aggressively 2. Beware of This Stock: One to Steer Clear of at All Costs

1. Top Stock Picks: “Magnificent Seven” Companies Worth Investing in Aggressively
2. Beware of This Stock: One to Steer Clear of at All Costs

THE S&P500 continues to soar through the first three months of 2024, fueled in part by the continued outperformance of the “Magnificent Seven.”

The seven monster stocks accounted for virtually all of the S&P 500’s positive performance in the first half of 2023 and have continued to advance as a group since then. Not everyone in the group beat the market in 2024, but those who did… Nvidia (NASDAQ:NVDA) And Metaplatforms — significantly outperformed. Apple And You’re here are the only members that lag significantly compared to the broader index.

If the performances of the Magnificent Seven since the start of 2023 have been spectacular, any good investor knows that past performance is no guarantee of future results. Investors should consider whether the current stock price justifies the company’s potential future returns. This is where one of the Magnificent Seven looks particularly attractive, and another member seems too expensive.

Magnificent Seven stocks to buy hand in hand now

Within this elite group of stocks, the most attractive valuation for long-term investors is Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Alphabet is the company behind Google, which last month took 92% of the global online search market. That kind of reach is enviable for almost any ad-supported Internet service, but Google can move the dial a little further with its ancillary services. It has nine distinct products with over a billion users. This gives it a ton of data about its user base, which it can use to tailor its advertising products and increase its prices compared to other companies.

Among these nine products with more than a billion users is its Android operating system. The mobile operating system has a dominant global market share while supporting nearly half of all smartphones in the United States, where Apple’s iPhone is exceptionally popular. Owning the mobile platform for the majority of smartphones used worldwide strengthens Google’s position in mobile search, despite regulatory challenges to its deal with Apple.

Google’s strong position in search has translated into advertising revenue growth of 11% in 2023. But Alphabet has several other growth drivers. Its public cloud computing service, Google Cloud, is growing rapidly, up 26% last year. Additionally, Alphabet’s Other Bets segment includes several promising companies, including Waymo, its autonomous vehicle company. If any of these projects prove successful, it could generate a multibillion-dollar opportunity for Alphabet and its investors.

Alphabet is well-positioned to experience consistent revenue and profit growth in the years to come. Meanwhile, the stock is trading at a forward P/E ratio of 22.4. This is a slight premium to the S&P 500, but still inexpensive compared to its other high-flying peers in the Magnificent Seven.

With consistent revenue growth and margin expansion, as well as the possibility of a potential gain, Alphabet appears to be the best stock to buy among the tech giants.

Magnificent Seven stock to avoid like the plague

If there’s one title among the “Magnificent Seven” that I can’t get on board with, it’s Nvidia. Despite the company’s strong performance, the stock price appears to have significantly outperformed actual results. Additionally, the company’s prospects don’t look as good as in the recent past.

Nvidia’s results have been driven by its data center business in recent years, which mainly stems from the rise of large language models (LLM) of artificial intelligence. Nvidia’s graphics processing units are well suited to LLM training. Its chips are more efficient and energy efficient than any other off-the-shelf solution, and it has managed to maintain this lead over its competitors for a long time now. As a result, data center revenues increased from $3 billion in fiscal 2020 to $15 billion in 2023 and $47.5 billion in 2024.

Not only did Nvidia’s revenue skyrocket, but its margins increased as well. Gross margin increased from 63% in the fourth quarter of last year to 76% this year. Likewise, it has demonstrated incredible operating leverage over the past year, with operating expenses barely budging relative to its revenue.

But there is one important factor driving these results: supply constraints. These supply constraints could be eased by the end of 2024, according to Nvidia’s manufacturing partner, Semiconductor manufacturing in Taiwan. At this point, gross margin will decline and Nvidia will need to sell more chips to maintain revenue growth.

Meanwhile, competitors are entering the market with viable alternatives to Nvidia’s GPUs. Additionally, some of its biggest customers, the big tech companies of the Magnificent Seven, have designed their own chips to form their LLMs. In addition to this, demand is expected to shift from GPUs needed for training LLMs to chips needed to run AI applications on devices. As a result, demand for Nvidia chips may not maintain its current level.

You don’t need an advanced degree in economics to understand that increasing supply and decreasing demand causes prices to fall. While Nvidia can certainly do well despite the pressure, its stock price is such that companies will continue to pay top dollar for as many chips as Nvidia can produce.

Shares currently trade at around 39 times forward earnings. But with profit margins under pressure as supply and demand levels normalize, it will be difficult for Nvidia to maintain earnings growth at a level that can make that high multiple worth it. for long-term investors.

Should you invest $1,000 in Alphabet right now?

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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy holds positions in Alphabet, Apple, Meta Platforms and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions and recommends Alphabet, Apple, Meta Platforms, Nvidia, Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool has a disclosure policy.

1 “Magnificent Seven” action to buy in hand and 1 to avoid like the plague was originally published by The Motley Fool

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