Are These the 2 Best "Magnificent Seven" Stocks to Buy Right Now?
Since the start of 2023, the S&P 500 and Nasdaq Composite Index have both performed extremely well despite the latest dip. A lot of credit for the market's run can go toward the ongoing AI boom that has helped lift the so-called "Magnificent Seven" stocks.
But right now, it can easily be argued that these companies trade at expensive valuations. For investors looking to put some money to work in what are considered to be disruptive, tech-driven, and industry-leading enterprises, I can see why the current situation could be discouraging.
It's best to remain optimistic. I believe two of the Magnificent Seven stocks, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META), actually look like smart buying opportunities today. Let's take a closer look.
Digital ad giants
It's almost impossible to overstate the wide reach and dominance of these two businesses. Alphabet, which owns some of the most popular internet properties on Earth, has six products and services that are each used by 2 billion people. Its flagship offering, Google Search, has a virtual monopoly on the market, controlling 91% share.
But don't discount Meta's standing. The social media powerhouse ended the second quarter with a whopping 3.27 billion daily active users. This number continues rising, increasing by 7% compared to the year-ago period.
I'd argue that because of their unmatched scale, there might be no two businesses that are as immune from competitive threats as Alphabet and Meta. Even if an entrepreneur had unlimited capital to develop a new search engine or social media app, it seems impossible that they could bring on users in massive quantities.
This clearly shows that Alphabet and Meta benefit from powerful network effects, perhaps having the widest economic moats around. And their ability to collect data is a massive advantage.
Unsurprisingly, advertisers love this. That's why these two companies combined generate 55% of worldwide digital ad revenue. According to Grand View Research, the industry is projected to grow at a compound annual rate of 15.5% between now and 2030, leading to meaningful expansion potential for Alphabet and Meta, especially as they continue to invest aggressively in artificial intelligence.
Financial prowess
Alphabet and Meta have been wonderful investments in the past. This is a direct result of their fantastic financial performance, with both businesses registering strong revenue and net income growth historically.
Their profitability is through the roof. In the past five years, Alphabet's and Meta's operating margins have averaged a ridiculous 26.6% and 35.1%, respectively. And in the three-month period that ended June 30, they each produced tens of billions of dollars in operating cash flow.
The balance sheets are also in pristine condition. Alphabet has a net cash balance of $87 billion, while Meta has $40 billion. Investors can sleep well at night knowing that there is almost no financial risk in owning these companies. Additionally, they should always be able to operate from a position of power, playing offense and investing in growth regardless of the economic climate.
When it comes to capital returns, both Alphabet and Meta have typically leaned on share buybacks. However, they both started paying dividends recently, which yielded under 0.5%.
Reasonable valuations
It's not too late to scoop up these dominant businesses. In fact, they are the two cheapest "Magnificent Seven" stocks to buy based on a popular valuation metric.
As of this writing, Alphabet and Meta trade at forward P/E ratios of 21.3 and 23.7, respectively, both sizable discounts to the Nasdaq-100 index. Considering all of the outstanding qualities described above, these two stocks look like no-brainer buying opportunities.
Should you invest $1,000 in Alphabet right now?
Before you buy stock in Alphabet, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
Suzanne Frey, an executive at Alphabet, 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. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
Are These the 2 Best "Magnificent Seven" Stocks to Buy Right Now? was originally published by The Motley Fool