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These players are among the cheapest of the “Magnificent Seven” tech stocks.
They each may benefit from the long-term AI story.
The "Magnificent Seven" tech stocks led the S&P 500 higher in recent years amid excitement about their involvement in the high-growth field of artificial intelligence (AI). But over the past several months, many of these players have lost some momentum -- and this has brought down their valuations.
For the strongest of companies, I see this as a temporary move as the long-term AI story remains intact. And that means right now is an excellent time to go bargain hunting and pick up shares of my two favorite discount "Magnificent Seven" stocks: Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT).
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1. Nvidia
Nvidia dominates the AI chip market, selling the graphics processing units (GPUs) that power crucial AI tasks. This has propelled the company to record revenue levels and double- and triple-digit growth in recent years. In the latest full year, for example, revenue climbed 65% to $215 billion.
The tech giant also has maintained high profitability on sales -- gross margin has exceeded 70% quarter after quarter over the past couple of years.
Meanwhile, Nvidia's commitment to innovation should keep it ahead of rivals. Nvidia has pledged to launch chip or system updates on an annual basis, and the next one is just ahead. The company is on track to ship the Vera Rubin system later this year. At the same time, it's important to note that companies across the AI market have steadily spoken of strong demand, so the overall environment looks bright.
All of this means Nvidia is a smart buy today at 22x forward earnings estimates.
2. Microsoft
Microsoft stock has struggled in recent times as investors worried that advancements in AI could replace software. But I don't think this will happen, at least not to a great extent. While AI may replace certain software, it's unlikely to upset platforms that are profoundly integrated into companies' operations -- like Microsoft's offerings.
It's also important to note that Microsoft has incorporated AI into its software suite -- you may be familiar with Copilot -- so as AI's capabilities advance, Microsoft's software also should benefit.
At the same time, Microsoft's cloud business offers its customers a variety of AI products and services, and this is driving tremendous growth. In the recent quarter, the AI business reached annual recurring revenue of $37 billion. So AI has been a big opportunity for Microsoft, and this is likely to continue as AI is more often applied to real-world problems.
Today, Microsoft is trading at 20x forward earnings estimates, making it the second-cheapest "Magnificent Seven" stock after Meta Platforms. At this level, it's a no-brainer discount buy.
Should you buy stock in Nvidia right now?
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
