The “Magnificent Seven” are the seven largest tech-focused companies that have dominated the broader market returns over the past decade. The term was coined by Bank of America analyst Michael Hartnett and includes companies such as Microsoft, Apple, Nvidia, Tesla, Amazon, Meta Platforms, and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL).
These mega-cap giants are part of verticals such as artificial intelligence (AI), cloud computing, social media, digital advertising, e-commerce, semiconductors, and electric vehicles. Several of these tech trends have allowed companies to deliver outsized gains to shareholders. In the last year, the Magnificent Seven Group has returned close to 60% to investors, outpacing the S&P 500 index, up 29%.
Should you invest in the Magnificent Seven?
Several investors expect the Magnificent Seven to continue to lead stock market returns in the upcoming decade as each of these companies is positioned to capitalize on megatrends, enabling them to grow at an enviable pace.
For instance, global enterprises are still in the early stages of digital transformation which should drive demand for cloud computing higher, benefitting companies such as Microsoft, Amazon, and Alphabet.
The AI megatrend has just begun, and the market is forecast to expand to more than US$1 trillion by the end of 2030. Each of the Magnificent Seven companies is investing heavily to enhance their AI capabilities and secure an early mover advantage.
While increasing exposure to these mega-cap giants makes sense, let’s see why I remain bullish on Alphabet stock right now.
The bull case for GOOGL stock
Valued at US$2 billion by market cap, Alphabet is the parent company of Google, the largest digital advertising platform in the world.
Despite its massive size, Alphabet’s revenue grew by 14% year over year to US$84.74 billion in the second quarter (Q2) of 2024. Comparatively, Wall Street forecasts Q2 sales to be US$84.19 billion. Its adjusted earnings per share of US$1.89 was also higher than estimates of US$1.84 in the June quarter.
Alphabet’s Google Cloud business surpassed the US$10 billion milestone for the first time in Q2, and the segment also reported an operating profit of US$1 billion.
Notably, Alphabet generates most of its sales from online ads, which rose to US$64.62 billion in Q2, up from US$58.14 billion last year. Ad sales have been under the pump in the previous three years due to higher inflation, rising interest rates, and slower consumer spending, all of which have tightened marketing budgets.
Further, YouTube remains the largest video platform globally but faces competition from short video platforms, including TikTok and Instagram.
Alphabet’s Other Bets business should help the company accelerate top-line growth. This segment includes Waymo, a self-driving entity that raked in US$365 million in sales in Q2, up from US$285 million last year. Alphabet emphasized that it would invest an additional US$5 billion in Waymo to expand its self-driving capabilities.
Is this Magnificent Seven stock undervalued?
Analysts tracking Google expect sales to grow by 13.2% to US$347.3 billion in 2024 and 11.2% to US$386 billion in 2025. Moreover, adjusted earnings are forecast to expand from US$5.8 per share in 2023 to US$8.71 per share in 2025. So, priced at 18.6 times forward earnings, GOOGL is the cheapest stock among the Magnificent Seven.
Down 15% from all-time highs, GOOGL trades at a 25% discount to consensus price target estimates.
