January 23 turned out to be an exceptional day for the stock market. The S&P 500 and Dow Jones Industrial Average closed at all-time highs. Simultaneously, three of the illustrious “Magnificent Seven” stocks reached unprecedented peaks – Microsoft (NASDAQ: MSFT) at $398.90 a share, Nvidia (NASDAQ: NVDA) at $598.73 a share, and Meta Platforms (NASDAQ: META) at $385.20 per share. The other four Magnificent stocks are Apple, Alphabet, Amazon, and Tesla.
Though Microsoft and Nvidia have reached new record highs on multiple occasions this year, Meta Platforms surpassed its previous record close of $382.18 a share on September 7, 2021, only on Jan. 23. This achievement holds even more significance as the stock has quadrupled since its plunge below $90 a share in early November 2022.
However, past performance does not guarantee future results. It is essential to analyze the pros and cons of these three companies to ascertain which one possesses the potential to sustain record highs, and which one is the better buy for 2024.
Image source: Getty Images.
Meta Platforms: A Balanced, More Value-Oriented Option
Although Meta Platforms has witnessed an epic 15-month rally, the stock remains relatively inexpensive from a valuation perspective, underscoring its unjustified sell-off and remarkable recovery. Regardless of one’s personal sentiment towards Facebook, Instagram, WhatsApp, or any of Meta’s other apps, it is indisputable that the company is a robust cash generator. Presently, Meta possesses the second-lowest price-to-free cash flow ratio among the Magnificent Seven.
You can think of Meta’s suite of apps as digital real estate. Meta offers some of the most cost-effective, efficient, and measurable ad spaces available. The company has made remarkable strides in enhancing and monetizing Instagram, dispelling doubts about its relevance in the face of competition from TikTok.
While Meta would be generating even more cash if it weren’t incurring substantial losses on Reality Labs, its augmented/virtual reality segment, its ability to absorb risks and withstand cash outflows without disrupting the business sets it apart from many other companies.
Considering its balanced nature and more value-oriented position among the Magnificent Seven stocks, there is much to admire about Meta Platforms.
META Price to Free Cash Flow data by YCharts
Nvidia: Unrivaled Growth Trajectory
Nvidia surpassed the $1 trillion market cap milestone last June, and its ascent shows no signs of abating as it approaches the $1.5 trillion mark. At this pace, Nvidia could easily overtake Amazon and Alphabet, positioning itself as the world’s third-most-valuable company. The pivotal factor is the market’s willingness to accord it an appropriate multiple.
NVDA Market Cap data by YCharts
Investing in Nvidia carries the risk that a considerable portion of its future growth is already factored into the current valuation. With a 78.3 price-to-earnings (P/E) ratio, Nvidia’s stock is far from cheap. Nevertheless, its growth story is undeniable.
NVDA Revenue (TTM) data by YCharts
The impressive 66.4% increase in sales and more than quadrupling of net income within a year exemplify Nvidia’s performance. Notably, its profit margins are exceptional. Generating $18.9 billion in net income from $44.9 billion in sales is almost unprecedented. Nvidia’s ability to derive substantial profits from each dollar of sales reduces the pressure to achieve significant sales growth in order to rationalize its P/E ratio.
Despite its current upswing, Nvidia has experienced downturns, particularly within the cyclical semiconductor industry. Major pullbacks and margin squeezes have resulted in declines in sales and profits, reminiscent of occurrences in 2019. The current enthusiasm from investors revolves around artificial intelligence (AI), as Nvidia’s AI accelerator processors drive OpenAI’s ChatGPT processors, garnering substantial orders from companies seeking to tap into the AI revolution.
Given its involvement in various trendsetting sectors such as crypto mining, gaming, and professional graphics, Nvidia’s stock is riding high. Whether the growth sustains or decelerates will determine if the stock offers value or is excessively priced. Notably, Nvidia’s strong performance contrasts with its exceedingly high valuation.
Microsoft: Harvesting the Fruits of AI
Microsoft seamlessly combines the strengths of both Meta Platforms and Nvidia. Like Meta, Microsoft is a cash-generating behemoth with a proven business model. Simultaneously, akin to Nvidia, Microsoft is making substantial investments in AI and is already reaping the rewards.
Microsoft stands as the AI sandbox, with a varied presence across different industries, offering a clear-cut pathway to capitalize on the surging AI trend.
The Innovative Edge of Microsoft’s Copilot in the AI Sector
Revolutionizing AI Integration
Microsoft’s Copilot is making waves in the AI sector, integrating generative AI into its existing applications. By acting as a user-friendly assistant, Copilot enhances the utility of Microsoft applications without complicating them further. This innovation marks a pivotal shift in Microsoft’s strategy, focusing on accessibility and seamless user experience, ultimately positioning the company as a frontrunner in the AI industry.
A History of Successful Integration
Microsoft’s forte lies in perfecting user-friendly and cohesive products. Historically, Microsoft Word and Excel weren’t necessarily the best in their categories, but what set Microsoft apart was its ability to package and deliver these applications seamlessly. The same philosophy is driving the development of Copilot, aimed at simplifying AI tools to appeal to a broader audience, including less tech-savvy individuals.
Strategic Utilization of Cash Flow
Microsoft’s strong cash flow positions the company to fuel organic growth, engage in stock buybacks, and even pursue strategic acquisitions. This financial robustness grants Microsoft the freedom to experiment with various AI solutions, fine-tuning them over time to ascertain their efficacy, without relying on mere chance for customer adoption.
Investment Potential
Given Microsoft’s robust risk-to-reward profile among the Magnificent Seven stocks, it stands out as an enticing investment opportunity. Comparatively, both Meta and Nvidia, while commendable, may not currently offer the same level of investment potential. Microsoft’s innovative strides in the AI sector make it a compelling choice for discerning investors.