You’ll regret not buying these “Magnificent Seven” stocks

By | April 2, 2024

Nvidia (NASDAQ: NVDA) became a darling of Wall Street last year when it cornered the artificial intelligence (AI) chip market and earned its place in the “Magnificent Seven,” a phrase used to describe the seven most prominent technology companies to describe. As a result, the company’s shares have risen 242% since March last year, based almost entirely on excitement about its AI prospects.

With the sector expected to grow at a compound annual growth rate (CAGR) of 37% until at least 2030, it is no wonder that investors have flocked to the market. However, there are many companies moving into AI and could have more room than Nvidia, or trade at a better value than the chipmaker.

It is therefore a good idea to look for alternative ways to invest in the emerging sector. Other companies in the Magnificent Seven are an excellent place to start, many of which are known for their long-term reliability and their heavy investments in AI.

So forget Nvidia. You’ll regret not buying these Magnificent Seven shares.

1. Alphabet

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) CEO Sundar Pichai describes the company as seven years into its “journey as an AI-first company.” This year, a poor debut for its new major language model Gemini cast doubt on its potential in the industry. However, the company remains a technology behemoth, with significant cash reserves that will likely see it maintain its dominance and eventually overtake its AI rivals.

Internal brands such as Android, YouTube, Chrome and Google have given Alphabet a powerful position in technology. These brands attract billions of users and have increased the company’s annual revenue by 90% over the past five years, while increasing operating income by 135%. Meanwhile, Alphabet’s many products create nearly endless opportunities to boost its business with AI.

By improving Gemini, Alphabet could serve more effective ads, develop a search experience closer to OpenAI’s ChatGPT, better analyze viewing trends on YouTube, and expand its AI cloud services on Google Cloud.

NVDA PE ratio chart (forward).

NVDA PE ratio chart (forward).

The chart above shows that Alphabet’s shares trade at a significantly better value than Nvidia’s, with a much lower price-to-earnings (P/E) and price-to-free-cash-flow ratio. These are useful valuation metrics because they take into account the financial health of a company. The lower the number, the better the value.

Furthermore, Alphabet’s free cash flow of nearly $70 billion, compared to Nvidia’s $27 billion, suggests it is potentially better equipped to continue investing in its business and overcome current headwinds.

The Google company may have encountered some obstacles this year, but that’s exactly why this is the perfect time to make long-term investments in its stock. The Magnificent Seven company has exciting prospects for the coming years and is trading at a bargain compared to Nvidia.

2. Amazon

Amazon (NASDAQ: AMZN) delivered impressive growth in 2023 after experiencing a decline due to the economic downturn in 2022. In fiscal 2023, Amazon’s revenues rose 12% year over year, while operating income more than tripled to 37 billion dollars.

Thanks to a solid recovery in e-commerce revenues over the past year, the company’s free cash flow has increased 904% to over $32 billion. This indicates that the country has the financial resources to continue expanding and overcome potential obstacles.

Amazon has come a long way since it started as an online bookstore out of Seattle almost thirty years ago. The tech giant has expanded into multiple industries, from an e-commerce titan to leading the cloud market, developing space satellites and venturing into grocery, gaming, consumer technology and more.

But all eyes have been on Amazon’s AI efforts over the past year. As the operator of the world’s largest cloud service, Amazon Web Services (AWS), the company has the potential to leverage its massive cloud data centers and drive the generative AI market.

In 2023, AWS responded to the increased demand for AI services by introducing a variety of new tools. Amazon is even using AI to boost its shopping site, announcing an AI shopping assistant called Rufus ahead of its latest earnings release.

Amazon is shaping up to be a major long-term threat in AI, but it also has a lucrative retail business that makes its stock too good to pass up.

NVDA EPS estimates for the next two fiscal yearsNVDA EPS estimates for the next two fiscal years

NVDA EPS estimates for the next two fiscal years

Furthermore, the table above indicates that Nvidia’s earnings could reach $36 per share over the next two fiscal years, while Amazon’s could reach $7 per share. At first glance, Nvidia seems like the clear winner. However, if we multiply these figures by the companies’ forward price-to-earnings ratios (Nvidia’s 36 and Amazon’s 43), this yields share prices of $1,309 for Nvidia and $301 for Amazon.

Given their current positions, Nvidia’s shares would rise 45% in fiscal 2026 and Amazon’s would rise 67%. In addition to a lucrative e-commerce business and a growing position in AI, Amazon is a Magnificent Seven stock worth considering over Nvidia right now.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon and Nvidia. The Motley Fool has a disclosure policy.

Forget Nvidia: You’ll Regret Not Buying These ‘Magnificent Seven’ Stocks Originally published by The Motley Fool

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