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Artificial intelligence has captured investors’ attention since ChatGPT burst onto the scene with viral popularity in early 2023. Since then, major tech companies, often called the “Magnificent Seven” stocks, have competed with massive investments in AI and rising growth expectations that have taken the broader stock market to new highs.
But recently volatility has returned to the markets, and many of these high-priced stocks have sold off their highs.
Remember, volatility is a feature of investing, not a flaw. No one knows what stock prices will do in the short term, but a sell-off can be a great long-term opportunity to buy the right stocks.
any Magnificent Seven Stocks What should investors focus on? Here's the prediction: Meta platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT) AI stocks will emerge as the stocks everyone wishes they had bought during this sell-off.
Here's why.
Meta has an inside track in the AI ​​race
Social media giant Meta Platforms may have everything a company needs to build a dominant business around AI. You need a massive amount of data to train AI models, and Meta has massive amounts of raw data on the 3.27 billion people who log into Facebook, Instagram, WhatsApp, or Threads every day.
AI models require a lot of computing power. Nvidia It has been a huge success. Preferred Supplier For AI chips. Meta has assembled nearly 600,000 of Nvidia’s flagship H100 GPUs and is working on designing a custom chip.
Finally, Meta has developed its own AI models. Llama is Meta’s large language model, which it implements across all of its apps and makes available for other developers to build on. Put all of this together, Meta is building an AI ecosystem over which it has full control.
Not many AI tech companies can do everything like Meta does. For example, Nvidia’s chips serve a specific purpose in AI: computing. apple It has excellent distribution across iOS devices but has enlisted the help of OpenAI's AI models. alphabet Google has similar advantages to Meta, but faces regulatory scrutiny over its monopoly on internet search.
The best thing about Meta is that it’s already a great company that AI makes even better. Already a force in digital advertising, Meta has launched AI tools for clients that boost ad effectiveness by helping match ads to their target audiences. Ad impressions grew 10% year-over-year in the second quarter, but the cost of advertising also increased 10%. Meta already generates $150 billion in annual revenue, and analysts believe it will grow at double-digit rates over the next four years.
Investors should view any sell-off as a long-term buying opportunity. The stock already looks reasonably valuation-wise, so investors don’t need to be too picky. The stock is trading at roughly 25 times Meta’s estimated 2024 earnings, and analysts believe those earnings will grow at an annual rate of 19% over the next three to five years. The resulting PEG ratio of 1.3 suggests the stock is roughly cheap for its expected earnings growth, so this dip is worth buying.
Demand for AI will boost Microsoft's cloud business
Microsoft seems to be everywhere in tech, and AI is no different. The company has deep roots in AI, including its exclusive partnership with OpenAI, its Azure cloud platform for AI computing needs, and major enterprise software that gives Microsoft direct access to millions of customers around the world. The cloud is already Microsoft’s most important and fastest-growing business unit, and AI could continue to fuel explosive growth.
Microsoft’s close relationship with OpenAI includes routing all of its computing operations through Azure. In other words, anyone using OpenAI products is technically running those applications through Azure.
That growth is already trickling down to Microsoft’s cloud computing business. Driven by demand for AI, management reported that Azure’s year-over-year growth beat Wall Street expectations in the second quarter. Management noted on the call that it would have grown more, but there was more demand for AI than there was computing power available. Microsoft is investing heavily in data centers and AI chips to increase that capacity, which should translate into more revenue and earnings over the coming years. Strong AI implementation could help push Azure closer to AmazonAWS has a leading position in the global market. AWS is the leading cloud, but Azure’s market share grew to 25% in Q1, an all-time high.
Microsoft’s position in AI and its reputation as a technology leader have led to a significant rise in its stock price. The stock’s forward price-to-earnings ratio of 32 is a bit high for a company that analysts estimate will grow earnings at an annual rate of 15% over the next several years. A high-quality company like Microsoft can remain expensive for a long time because most investors know and appreciate how great the stock is. Selling would be a great opportunity to buy shares at a fair price.
Should you invest $1000 in Meta Platforms now?
Before you buy shares in Meta Platforms, keep this in mind:
the Motley Fool Stock Advisor The team of analysts has just identified what they believe to be Top 10 Stocks There are 10 stocks available for investors to buy right now… and Meta Platforms isn't one of them. The 10 stocks that make it could deliver massive returns in the years to come.
Think about when Nvidia I made this list on April 15, 2005… If you invested $1,000 at the time of our recommendation, You will have $763,374.!*
Stock Advisor It 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. Stock Advisor The service has More than four times S&P 500 Index Return Since 2002*.
*Stock Advisor returns as of August 12, 2024
Susan Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former chief market development officer and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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. Justin Pope The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: Buy $395 January 2026 calls on Microsoft and sell $405 January 2026 calls on Microsoft. The Motley Fool has Disclosure Policy.
Prediction: These 'Magnificent Seven' Stocks Will Remain Great AI Stocks to Buy, Despite Severe Sell-Off Originally posted by The Motley Fool
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