The term "Magnificent Seven" was coined by Wall Street last year to describe a powerful group of technology companies with a combined market capitalization of $15.7 trillion. The seven companies are:
Microsoft (NASDAQ: MSFT)
Meta Platforms (NASDAQ: META)
Nvidia
Apple
Amazon
Alphabet
Tesla
So far in 2024, these Magnificent Seven stocks delivered an average return of 40%, which is double the 20% gain in the S&P 500 index. That's a key reason investors watch them so closely.
Corporate America is heading into a new earnings season for the quarter ended Sept. 30, which will give investors a fresh look at the financial performance of their favorite companies. Microsoft and Meta Platforms are due to release their results at the end of October, and here's why it might be a good idea to buy shares in these two Magnificent Seven right now.
1. Microsoft
Few companies are better positioned to profit from the artificial intelligence (AI) revolution than Microsoft. The company invested $1 billion in ChatGPT creator OpenAI back in 2019 and followed that up with a new $10 billion partnership with the start-up early last year. Microsoft has used OpenAI's latest AI models to create the Copilot virtual assistant, and it also offers those models to businesses on its Azure cloud platform.
Copilot is capable of answering complex questions and generating text content, images, and even computer code with a simple prompt. It's now embedded in many of Microsoft's flagship software products, such as Windows, Bing, and Edge. For an additional monthly subscription fee, it's also available in 365, which includes Word, Excel, and PowerPoint.
During Microsoft's fiscal 2024 fourth quarter (ended June 30), the number of corporate customers who purchased over 10,000 Copilot add-ons for their 365 subscriptions doubled from just three months earlier. Since there are more than 400 million paid 365 seats in the corporate sector worldwide, Copilot could become a substantial source of revenue if even a fraction of them sign up. Investors should watch for further updates on that front in the upcoming quarterly report.
But the Azure cloud platform will probably headline the report once again because it's consistently the fastest-growing segment of Microsoft's entire organization. Azure's revenue increased by 29% year over year during the last quarter, and eight percentage points of that growth came from its AI services -- that number increased eightfold from one percentage point in the year-ago period. Those services include providing data center computing capacity for AI developers and access to the latest large language models (LLMs), like OpenAI's GPT-4.
Microsoft stock is currently down 12.4% from its all-time high. It's trading at a price-to-earnings (P/E) ratio of 34.7 as of this writing, which is a premium to the 31.7 P/E ratio of the Nasdaq-100 technology index. In other words, Microsoft stock looks slightly expensive relative to its big tech peers.
However, investors will be hard-pressed to find another company capable of monetizing AI through both consumers and businesses at such a large scale. Therefore, buying Microsoft stock at a discount to its all-time high might be a great move ahead of its upcoming earnings report, which should feature several AI updates.
2. Meta Platforms
Meta Platforms stock has been on a tear since hitting its bear-market bottom in October 2022. It's up by a whopping 544% since then, and the company's earnings have been a key part of that story. Meta CEO Mark Zuckerberg dubbed 2023 the "year of efficiency" and proceeded to slash costs across the entire company, driving a surge in its profitability, and that momentum carried into 2024.
Despite Meta spending heavily on AI infrastructure recently, it still managed to generate $13.4 billion in net income during the second quarter of 2024, a 73% increase from the same quarter last year. That propelled the company's trailing-12-month earnings per share to $19.59 -- an eye-popping 128% higher than in the prior 12 months.
Wall Street expects Meta's upcoming third-quarter earnings per share to come in at $5.21, representing 18.6% year-over-year growth. The decelerating increase implies a focus on sustainable profitability without compromising important capital expenditures on its critical AI initiatives. To date, Meta has launched a number of AI features for users and advertisers on its social networks, Facebook, Instagram, and WhatsApp.
The Meta AI virtual assistant is accessible across all the company's apps. It's capable of answering complex questions, settling debates in your group chat, offering gift ideas, and even generating images. It lays the foundation for Meta's upcoming Business AI tools, which will include virtual agents to handle customer queries around the clock without human intervention. Meta believes every business will eventually have a unique AI agent, which could unlock new revenue streams for the tech giant.
Meta's AI features are powered by Llama, the LLM it developed in-house. The company is currently developing Llama 4, which is the latest version due for release next year. Zuckerberg thinks it will be so advanced that it could set the benchmark for the entire AI industry. Reaching that point won't be cheap, though, with Meta planning to spend up to $40 billion on AI data center infrastructure this year and even more next year, which could impact its earnings.
With that said, Meta stock is trading at a P/E ratio of 30.3 right now, so it's still cheaper than the Nasdaq-100 index despite its spectacular gain since 2022. That presents a great setup for investors heading into an exciting earnings report, which should reveal more information about the company's AI opportunities and growth trajectory.
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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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has 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 on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 "Magnificent Seven" Stocks to Buy Hand Over Fist in October was originally published by The Motley Fool