Nonetheless, past performance does not guarantee future results. Analysis of the pros and cons of these three companies is crucial in determining which stands the best chance of sustaining record highs and presenting the best investment opportunity for 2024.

Image source: Getty Images.

Meta Platforms: Undervalued Gem of the Magnificent Seven

Despite Meta Platforms’ remarkable 15-month rally, the stock, from a valuation perspective, remains reasonably priced – highlighting how undervalued Meta was and how its significant selloff was unwarranted.

Regardless of personal sentiment towards Facebook, Instagram, WhatsApp, or any of Meta’s other apps, it’s impossible to overlook the company’s position as a lucrative cash cow. In reality, Meta boasts the second-lowest price-to-free cash flow ratio among the Magnificent Seven.

META Price to Free Cash Flow data by YCharts

Analogous to digital real estate, Meta’s apps provide some of the most cost-effective, efficient, and measurable advertising space available. The company has made incredible strides in improving and monetizing Instagram, debunking skepticism about its future relevance in the wake of TikTok’s emergence.

Meta would be raking in even more cash if it weren’t hemorrhaging billions on Reality Labs, its augmented/virtual reality segment. However, this is emblematic of Meta’s capacity to navigate risks and losses without derailing its business – a luxury few other companies enjoy.

Meta, being a balanced and undervalued Magnificent Seven stock, has much to offer as an investment.

Nvidia: Meteoric Growth Trajectory

Nvidia breached the $1 trillion market cap milestone last June and has relentlessly surged since. Currently, it is poised to surpass the $1.5 trillion threshold. At this pace, Nvidia could conceivably surpass Amazon and Alphabet to become the third-largest company globally. The caveat, however, lies in the market’s willingness
to confer an appropriate valuation.

NVDA Market Cap data by YCharts

Conversely, the primary risk of investing in Nvidia is the heavy expectations baked into its current valuation. With a 78.3 price-to-earnings (P/E) ratio, Nvidia is far from bargain territory. Nevertheless, its staggering growth is undeniable.

NVDA Revenue (TTM) data by YCharts

The depicted chart illustrates the remarkable one-year surge in Nvidia’s sales by 66.4%, accompanied by a more than quadrupled net income. However, it is Nvidia’s margins that truly stand out. Earning $18.9 billion in net income from $44.9 billion in sales is nearly unprecedented. Nvidia generates such substantial
profits per dollar in sales that it doesn’t necessitate substantial revenue growth to deflate its P/E ratio.

Despite its evident success, Nvidia has had its share of downturns. The semiconductor industry is highly cyclical, leading Nvidia to experience significant pullbacks – a pattern seen in 2019, and notably last year when its margins and financials tumbled.

The current enthusiasm stems from the company’s foothold in artificial intelligence (AI). Nvidia’s AI accelerator processors, powering OpenAI’s ChatGPT processors, are attracting substantial orders as other companies seek to embrace AI. Nvidia CEO Jen-Hsun Huang, on the Q3 2024 earnings call, remarked, “We’re at the
beginning of a basically across-the-board industrial transition to generative AI to accelerated computing. This is going to affect every company, every industry, every country.”

Nvidia’s products have spearheaded numerous trends including crypto mining, gaming, and professional graphics. Should the growth persist, the stock might seem undervalued; any deceleration, however, might render it overvalued. While Nvidia, as a company, is thriving, its stock is exceedingly expensive.

Microsoft: A High-Potential Convergence of AI and Proven Business Acumen

Microsoft embodies the best of both worlds offered by Meta Platforms and Nvidia. Much akin to Meta, Microsoft is a cash-generating powerhouse boasting a proven business model. Simultaneously, Microsoft is heavily investing in AI and promptly reaping the returns.

Microsoft, in my view, serves as the AI playground. The company’s diversification across various industries positions it as a fundamental player in capitalizing on AI, much like a grandmaster playing chess.

Microsoft’s Unique Advantage in Harnessing AI For Growth

Riding the Wave of History

Microsoft’s history is drenched in the art of perfecting sticky products. Microsoft Word and Excel weren’t necessarily the best applications in their categories, yet what Microsoft excelled at was packaging these programs and making them user-friendly.

AI Innovation Without Complexity

Making AI tools too complicated has the potential to repel less tech-savvy users. Microsoft has drawn from its historical playbook with Copilot, generative AI that seamlessly integrates into existing Microsoft applications. It essentially functions as an assistant, enhancing the applications’ utility without adding complexity.

Financial Leverage and Strategic Flexibility

Microsoft generates substantial cash flow, which it utilizes for organic growth, stock buybacks, and potential acquisitions. Unlike other companies, Microsoft does not rely on hope for AI adoption. Instead, it experiments with various solutions, fine-tunes them over time, and determines what resonates with customers.

Add it all up, and Microsoft has arguably the best risk/potential reward profile of any of the Magnificent Seven stocks. And for that reason, I’d buy it over Meta and Nvidia right now, although both of those picks have a lot going for them as well.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors.