Investing Preview 2024: Buy These 4 "Magnificent Seven" Stocks. Avoid the Others. – The Motley Fool

Investing exposure to 'Magnificent Seven' stocks will make 2023 a hugely successful investment year. This group of mega-cap tech stocks includes: Nvidia (NVDA), Amazon (AMZN -0.94%), tesla (TSLA -1.86%), apple (AAPL -0.54%), microsoft (MSFT 0.20%), meta platform (meta -1.22%)and alphabet (GOOG -0.25%) (Google -0.39%)yet outperformed the broader market. Nasdaq Composite Last year, it jumped more than 45%.

If it ain’t broke, don’t fix it…right? Well, not exactly. This number shows that some of these truly great stocks could run out of steam quickly. Here are four stocks in this group worth buying in 2024 and three stocks to keep in 2023.

1. Nvidia: Buy

Nvidia's chips are specialized for demanding high-computing applications and are the focus of advances in artificial intelligence (AI). The company has quickly established dominance and controls up to 90% of the AI ​​chip market. This has pushed the business to new heights, with sales growth accelerating 200% year-on-year, reaching $18 billion in the most recent quarter.

NVDA PE Ratio (Forward) Depends on the data Y chart

The demand for AI doesn't seem to be going anywhere, which should lead to significant growth for Nvidia going forward. Analysts believe the company's profits will grow 42% annually over the next few years, perhaps justifying NVIDIA's valuation of 40 times 2023 earnings. This shows that the stock remains attractive despite a PEG ratio of just 1 and a massive 250% upside in 2023.

2. Apple: Avoid

Not all of the Magnificent Seven companies are growing enough to maintain their stock prices. Apple's sales have declined over the past year, and net income has increased by just 1%. Apple's business is cyclical and can go through periods of growth depending on major iPhone releases. That's fine, but things can get complicated when stock prices and earnings go in different directions.

AAPL PER (futures) chart

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Analysts have lowered their expectations for Apple's future growth. The 2023 P/E ratio is over 29x and the PEG ratio is over 3x, making buying Apple a tough pill to swallow here. Investors will have to wait until prices become meaningful again.

3. Metaplatform: Buy

In 2022, Wall Street was tough on Meta. At the time, the company was battling a slowing advertising business, damaging privacy changes to the iPhone, and an expensive Metaverse project that wasn't seeing a return on investment. The stock price fell to $89, but CEO Mark Zuckerberg got the ship back on track by cutting costs, tackling the iPhone challenges, and getting revenue growth and profits back on track.

META PE ratio (futures) chart

META PE ratio (forward) Depends on the data Y chart

Surprisingly, the stock remains attractive with a P/E ratio of just 25x in 2023, and is expected to continue to grow at an average annual growth rate of 20%. Meta still turned out to be a great business, but Wall Street largely forgot about it. Although the 2023 rally dispelled any pessimism, there is still room for growth that the meta can achieve in 2024 and beyond.

4. Microsoft: Avoid

ChatGPT became a sensation in 2023, and Microsoft quickly jumped on board, signing a multibillion-dollar investment and expanding partnership with its creator, OpenAI. From enterprise software to cloud computing to gaming, Microsoft is one of the world's largest and most diverse technology companies. Cloud's position within the AI ​​opportunity appears to be driving analyst expectations for revenue growth in the coming years.

MSFT PER (futures) chart

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Growth rates in the mid-teens are not negligible, but with a market capitalization of $2.8 trillion, it's becoming difficult to call Microsoft a growth stock. With a forward P/E of over 33, this stock has a PEG ratio of over 2, making it less attractive than other 'Magnificent Seven' stocks.

it's not horribly expensive, but after a meteoric rise of 57% in a single year, there are better deals out there. It's okay for investors to be picky.

5. Amazon: Buy

Interestingly, e-commerce and cloud leader Amazon trades at a PEG ratio of just over 2, similar to Microsoft. So why should investors consider buying Amazon over similarly valued Microsoft? Amazon is famous for investing its profits in its business, but that doesn't mean its true profit potential. It is possible that you are underestimating it. The stock trades at 57 times final earnings, but only 22 times operating profit, which is the profit earned from day-to-day operations.

AMZN PER (Futures) Chart

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Over the past decade, this has been more than 20% lower than Amazon's average price-to-operating margin. Amazon has a number of initiatives underway, including investing in the development of AI technology, which is a key element for its future. This doesn't even mention e-commerce, which still has room to grow for decades to come (e-commerce only accounts for 15% of U.S. retail).

6. Tesla: Avoid

Electric vehicle and energy company Tesla is another example of a stock whose price and fundamentals are trending in opposite directions. Tesla began lowering prices in 2023 to increase sales. The idea is that as more cars are manufactured and sold, Tesla will be able to lower prices, a cycle that will force competitors to drive prices out of the market. This was a bold move and had a short-term impact on Tesla's performance. Gross margin decreased 22% over the past year.

TSLA PE ratio (futures) chart

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Hopefully, sales will grow enough to quickly realize the cost savings Tesla is aiming for. Analysts are aggressively lowering their expectations for Tesla's future profit growth due to the price cuts. If analysts are right, Tesla stock is much more expensive, with a PEG ratio of more than 4x. With the stock up 130% last year, investors may want to wait to buy until the numbers prove Tesla's price-cutting strategy was correct.

7. Alphabet: Buy

Alphabet's dominance over Google and YouTube overshadows its behind-the-scenes AI potential. The company relies on AI to help customers maximize ad spend on its platform (the way Alphabet makes most of its revenue). A huge trove of user data and pole position among the world's most trafficked websites make Alphabet a boring but effective money printing machine.

GOOGL PER (Futures) Chart

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The company has spent much of its cash flow on massive stock buybacks, and the number of shares outstanding has declined 10% over the past five years. With a recipe for growth and share buybacks, analysts expect revenue to rise more than 17% annually. Although the valuation has increased due to the stock's 57% increase in 2023, the PEG ratio of 1.4x remains a solid deal for long-term investors.

John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Justin Pope has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.



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