Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META) are up big since the start of 2023. But all three megacap growth stocks have sold off in recent months and are now down over 10% from their all-time highs.
When great companies go on sale, it can be challenging to decide which one to buy. And you may not want to sell out of a stock you like to buy another one.
Exchange-traded funds (ETFs) offer a way to invest in multiple companies in an amount you are comfortable with and for a low fee. The Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) has sizable holdings in Nvidia, Microsoft, Meta Platforms, and other top growth stocks.
Here’s why all three stocks are great buys now and what makes the Vanguard Mega Cap Growth ETF one of the simplest and most effective ways to invest in all three companies.
Nvidia is growing into its valuation
Nvidia may be down around 20% from its all-time high set earlier this summer. But the stock has still more than doubled in 2024 — which illustrates just how hot it has been.
Fortunately for long-term investors, the recent pullback in Nvidia seems mostly due to valuation concerns — not the core business. Nvidia’s stock price is up over 400% in the last three years, but its diluted earnings per share (EPS) are up over 500% — which has helped keep the valuation (somewhat) reasonable. But that pace of growth is unsustainable.
Even so, analyst consensus estimates call for $2.72 in 2025 earnings per share (EPS) and $3.74 in fiscal 2026 EPS. For context, Nvidia earned $1.19 in fiscal 2024 diluted EPS.
Nvidia has come a long way, but it is still valued based on its potential earnings rather than where it is today. The stock could begin to look expensive if there’s an unexpected slowdown in demand for its graphics processing units to fuel artificial intelligence (AI) workflows or if competition adds pricing pressure on Nvidia and leads to lower margins.
It’s up to the market to decide what it wants to pay for the stock. But Nvidia stands out as a solid buy until the investment thesis changes. The company retains its dominant market share, and there haven’t been any red flags indicating its position is waning.
Microsoft just reported a banner year
Microsoft reported its fourth-quarter fiscal 2024 earnings last Tuesday. Despite the results being primarily in line with expectations, the stock pulled back as much as 7% after hours. One possible explanation for the knee-jerk reaction is that investors had grown accustomed to Microsoft blowing expectations out of the water.
At times like this, it’s better to look at the actual results of the business instead of using its stock price as a yardstick. And Microsoft’s results have been nothing short of impeccable.
| Metric | 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|---|
| Revenue (in billions) | $245.12 | $211.92 | $198.27 | $168.09 | $143.01 |
| Operating margin | 45% | 42% | 42% | 42% | 37% |
| Diluted EPS | $11.80 | $9.68 | $9.65 | $8.05 | $5.76 |
Data source: Microsoft. All data based on Microsoft’s fiscal year, which ends June 30.
Earnings have doubled in five years, outpacing revenue growth and leading to higher margins. Microsoft has turned into a cash cow and has a sizable capital return program, including significant stock repurchases and the largest dividend expense of any U.S.-based company.
Microsoft is a complete company that is deserving of its premium valuation. The company has a price-to-earnings (P/E) ratio of 35 compared to 28.4 for the S&P 500 index.
Meta Platforms is a great value
Unlike Nvidia and Microsoft, which have P/E ratios above the S&P 500’s, Meta Platforms trades at a discount to the benchmark. It also has the highest free cash flow (FCF) yield out of the “Magnificent Seven” — a group of tech-focused companies that includes Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla.
META Free Cash Flow Yield data by YCharts
FCF yield is a useful metric for determining how much FCF a business is generating based on its value. The formula is simply FCF divided by market cap or FCF per share divided by the stock price.
Meta’s 4% FCF yield illustrates just how much of a cash cow its business is. It means the company could be paying a 4% dividend yield — fully supported by FCF. But since Meta only recently began paying a dividend and the yield is just 0.4% — a better way of looking at FCF yield is the amount of extra cash the company has to repurchase stock or reinvest in the business. In this case, it’s tens of billions of dollars per year.
Meta has been doing a phenomenal job leveraging AI across its apps to boost user engagement and advertising effectiveness. Meta is a great buy for investors who believe in the company’s ability to continue monetizing Instagram while growing its user base and engagement.
Using ETFs to invest in growth stocks
Whether regularly contributing savings to a portfolio or managing what we already have, we all have a limited amount of capital to deploy into the stock market. There are always plenty of good stocks to buy; the question is which ones to buy and how much to allocate to each.
The Vanguard Mega Cap Growth ETF invests in 71 different growth stocks — including a whopping 57.5% in the Magnificent Seven. More specifically, 30% of the fund is in Nvidia, Microsoft, and Meta Platforms. This top-heavy concentration provides meaningful exposure to each stock while also maintaining diversification across different end markets.
Another advantage of the ETF is that the minimum investment is just $1, and the expense ratio is .07% — or just 7 cents for every $100 invested. Buying one full share of Meta Platforms, Microsoft, and Nvidia costs over $900 — which may be inconvenient if your portfolio inflows are smaller. The Vanguard Mega Cap Growth ETF provides a way to maintain diversification no matter the portfolio size — which is an advantage if you are looking to dip your toes into megacap growth stocks.
