The ‘Magnificent Seven’ group of stocks is a phrase coined by CNBC’s Jim Cramer to describe the group of stocks that have led the market in recent years. It consists of:
Nvidia (NASDAQ: NVDA)
Apple (NASDAQ: AAPL)
Microsoft (NASDAQ: MSFT)
Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL)
Amazon (NASDAQ: AMZN)
Metaplatforms (NASDAQ: META)
Tesla (NASDAQ: TSLA)
If you had invested in this group of stocks a few years ago, your returns would have been excellent and market-crushing. However, alongside this run-up, valuations have also risen, and many of the ‘Magnificent Seven’ cohorts have become pricey on a valuation basis.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
One stock that has not yet received an ultra-premium valuation is Alphabet. In fact, it is the cheapest member of the ‘Magnificent Seven’ when the price-to-earnings ratio is used. At just 22 times forward earnings, Alphabet is even cheaper than the broader market (as measured by the S&P500 (SNPINDEX: GSPC)), which trades at 23.8 times forward earnings.
So is Alphabet stock a screaming buy, or a value trap?
Alphabet is probably better known as Google’s parent company. Although Alphabet does many things, advertising is its most important business segment as 75% of its revenue comes from advertising-related sources. The largest source is the Google search engine, but YouTube advertisements also play a major role.
Advertising is not a huge growth driver for the company; it’s what keeps the lights on. However, in the third quarter it did quite well, with advertising revenue increasing 10.4% year over year. This strong fundamental performance in the largest segment allows the company to invest in other areas to drive growth. One of the most successful supporting segments is Google Cloud, its cloud computing wing.
According to Synergy Research Group, Google Cloud ranks third in terms of market share in the cloud computing market. However, it is also growing the fastest, as revenue grew 35% year over year. It also delivered strong operating margins of 17%, which is a huge improvement over last year’s 3.2% margin. While it still has a way to leverage the industry-leading margins of its closest competitor, Amazon Web Services (AWS) (which posted a 38% operating margin in the third quarter), it shows that Google Cloud is still improving its profitability can improve enormously.
The power of Google Cloud can be traced directly back to the demand for artificial intelligence (AI), as the platform has quickly become one of the top choices for building AI models. Google Cloud’s industry-leading tools help customers save costs on running AI models, thanks to the combination of GPUs and TPUs (tensor processing units, Google’s custom AI chip that delivers much better performance than GPUs).
Alphabet’s third quarter was phenomenal for the entire company, with revenue up 15% year-on-year, compared to 11% growth in 2023. However, thanks to several efficiency measures, Alphabet’s operating margin improved by four percentage points to 32% , which boosted earnings per share (EPS). ) from $1.55 last year to $2.12 this year – a gain of 37%.
This performance far outpaces other ‘Magnificent Seven’ stocks such as Microsoft and Apple, each of which posted lower earnings growth than Alphabet (Apple was hit with a one-off tax charge during the last quarter; without that impact, earnings per share would have fallen by 12%).
MSFT chart for operating income (quarterly annualized growth).
Looking at the chart, it’s clear that Alphabet is also outperforming these two for the year, but Alphabet’s stock is trading at a significant discount to these two.
MSFT PE ratio (forward) chart
If Alphabet were to trade at Microsoft’s valuation, it would be worth $3.17 trillion – more valuable than Microsoft, which had a market cap of $3.12 trillion at the time of writing.
Despite its dominance, Alphabet does not receive the same respect as other major technology companies. As a result, I think it’s a great stock to buy because the valuation risk of owning Alphabet stock isn’t there (unlike its peers). With its cheap share price and strong growth potential, Alphabet is well positioned to crush the market in the coming years. As a result, I think this is the best “Magnificent Seven” stock to buy right now.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Amazon: If you had invested $1,000 when we doubled in 2010, you would have $23,446!*
Apple: If you had invested $1,000 when we doubled in 2008, you would have $42,982!*
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $428,758!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 4, 2024
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. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet, Amazon, Meta Platforms and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 “Magnificent Seven” Stock That’s a Screaming Buy Right Now was originally published by The Motley Fool
