The S&P 500 is widely regarded as the best gauge for the overall U.S. stock market. But seven companies -- the "Magnificent Seven" -- account for one-third of its market capitalization. Those seven companies were also responsible for 60% of the gains in the S&P 500 since January 2023.
Investors looking for the best Magnificent Seven stock to buy now should consider Wall Street's median price targets, which are listed below in alphabetical order. Beside each target is the implied upside as of Aug. 18.
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG): $205 per share (26% upside)
Amazon: $220 per share (24% upside)
Apple: $250 per share (11% upside)
Meta Platforms: $575 per share (9% upside)
Microsoft: $497.50 per share (19% upside)
Nvidia: $140 per share (12% upside)
Tesla: $225 per share (4% upside)
At the median, analysts see upside in every Magnificent Seven stock, but none more so than Alphabet. In other words, Wall Street views Alphabet as the single best Magnificent Seven stock to buy now. Here's what investors should know.
Alphabet is supercharging its growth engines with artificial intelligence
Alphabet has two important growth engines in its advertising and cloud computing businesses. Both markets are growing at a steady pace. Research company eMarketer estimates digital ad spending will increase at 8% annually through 2027, and International Data Corp. estimates public cloud revenue will increase at 19% annually through 2028.
Alphabet has a strong presence in both markets. It is the biggest digital advertiser in the world and the third-largest public cloud in terms of revenue. That essentially puts the company on a glide path to double-digit sales growth for the foreseeable future. But Alphabet is also tapping its artificial intelligence (AI) expertise to supercharge growth in both businesses.
In advertising, Alphabet has six products with more than 2 billion monthly users. Those products support its ability to collect data and deliver relevant ad content to internet users, which makes Alphabet an indispensable partner for many brands, especially where Google Search is concerned. The company has integrated AI into all six products.
CEO Sundar Pichai recently said generative AI overviews are driving "increases in [Google Search] usage and increased user satisfaction with the results," particularly among users aged 18 to 24. That is encouraging given concerns that Google could lose market search share to OpenAI. Nothing of the sort has happened thus far, and AI-focused innovation could cement Alphabet's leadership in internet search. Beyond that, Alphabet has also introduced AI-powered tools that help media buyers create ad content and optimize profits.
In cloud computing, Google Cloud is much smaller than Amazon Web Services and Microsoft Azure, but the company gained a percentage point of market share in the past year. That was due in part to demand for AI products, especially the new Gemini family of models. The share gains could continue as businesses invest more aggressively in AI.
Pichai recently told analysts, "Our AI infrastructure and generative AI solutions for [Google Cloud] customers have already generated billions in revenues and are used by more than 2 million developers." Demand for AI products caused Google Cloud revenue growth to accelerate in the June-ended quarter, and management spoke optimistically on the earnings call about the long-term opportunity. Pichai thinks AI will be a "big driver over time."
Antitrust regulators recently dealt Alphabet a blow
A U.S. district court judge recently ruled that Alphabet violated antitrust law by paying browser developers and smartphone manufacturers to make Google Search the default search option. For instance, the company paid Apple about $20 billion in 2022 for default placement on the Safari browser and iOS devices. Alphabet also pays Samsung an undisclosed amount for similar perks.
The outcome of the lawsuit remains unclear. But J.P. Morgan analysts estimate that contested contracts account for about 25% of Google Search revenue, or 15% of total revenue. Alphabet plans to appeal the recent ruling, but the appeals process could take years. Ultimately, it seems likely the company will be prohibited from paying to make Google Search the default option on browsers and devices. That could theoretically have a substantial impact on its financial results.
In 2020, Alphabet estimated losing the default position on Safari browsers and iOS devices could cost more than $32 billion in annual revenue. That said, some analysts think the company could benefit. "If users are given a choice screen and most select Google, [Alphabet] might save more money in payments to Apple, Samsung, and others than it loses in search advertising," according to The Wall Street Journal.
Alphabet stock trades at a reasonable price compared to Wall Street's growth forecast
In summary, Alphabet has a strong presence in digital advertising and cloud computing, and the company is creating new monetization opportunities by adding artificial intelligence features to both product ecosystems. There are undoubtedly risks related to regulatory scrutiny, but Google Search possesses tremendous brand authority, which could help it overcome any hurdles arising from the ongoing litigation.
With that in mind, Wall Street expects Alphabet to grow earnings per share at 17% annually over the next three years. That consensus estimate makes the current valuation of 23.4 times earnings look reasonable. Those figures give a PEG ratio of 1.3, which is slightly below the three-year average of 1.4. Investors should consider buying a small position in this Magnificent Seven stock today.
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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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Amazon, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, JPMorgan Chase, 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.
The Best "Magnificent Seven" Stock to Buy Right Now, According to Wall Street was originally published by The Motley Fool