There's strong evidence that one of the biggest contributors to the market's ongoing bull market rally is artificial intelligence (AI). The boom that began early last year has continued, though market watchers have been debating whether it could last. Results released today by one member of the auspicious collective known as the "Magnificent Seven" put the debate to rest, at least for the time being.
With that as a backdrop, social media maven Meta Platforms (META 0.43%) climbed 4.3%, e-commerce pioneer Amazon (AMZN 3.43%) rose 3.1%, and enterprise software giant Microsoft (MSFT 1.82%) climbed 1.9%, as of 1:24 p.m. ET.
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Evidence that the AI boom will continue
The catalyst that seems to have sparked a rally among some members of the Magnificent Seven was a blockbuster earnings report from member Nvidia (NVDA 6.18%). The chipmaker arguably confirmed the coming AI boom when early last year the company reported record revenue in its data center segment, which includes processors used for AI. That trend has continued and Nvidia's fortunes, along with that of its shareholders, have risen with it.
For its fiscal 2024 fourth quarter (ended Jan 28.), Nvidia delivered revenue of $22.1 billion, surging 265% year over year, while climbing 22% sequentially. This boosted already strong profitability, with adjusted earnings per share of $5.16, which surged 486% and increased 28% quarter over quarter. This marks the third successive quarter that Nvidia has generated triple-digit year-over-year sales and profit growth.
CEO Jensen Huang left no doubt as to what fueled the chart-topping results. "Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries, and nations," he said.
The Magnificent Seven
The Magnificent Seven were among Wall Street's top performers last year. The common thread that unites these industry leaders is their undeniable ties to AI. Since it was arguably the accelerating adoption of generative AI that helped spark last year's stock market rally, it isn't surprising these companies were among the top beneficiaries in 2023:
- Nvidia: Up 239%
- Meta Platforms: Up 194%
- Tesla: Up 102%
- Amazon: Up 81%
- Alphabet: Up 58%
- Microsoft: Up 57%
- Apple: Up 48%
The widespread use of these advanced algorithms is expected to increase at a rapid clip over the next few years. Generative AI is expected to grow at a compound annual growth rate of 42%, topping $1.3 trillion by 2032, according to data provided by Bloomberg Intelligence. Given the magnitude of that opportunity, it's reasonable that the biggest players in the field will reap the biggest rewards -- but not all the Magnificent Seven stocks will benefit equally.
Profiting from AI
We're only just beginning to understand how pervasive generative AI will be, but the Magnificent Seven companies highlighted above have carved out lucrative niches for themselves in the AI revolution:
- Nvidia designs the chips with the computational horsepower necessary to train and run AI systems -- and has seen its sales soar as the adoption of AI took hold.
- Meta Platforms is an AI pioneer, deploying the technology to deliver relevant content to users on its social media platform, identify people in photos posted on its site, and target advertising to its users. Not content to stop there, Meta introduced LLaMA AI, among the top large language models offered on the major cloud computing platforms.
- Amazon has long used AI systems to control its e-commerce empire, from scheduling deliveries to controlling inventory levels and everything in between, and has already added a growing list of AI tools for its Amazon Web Service cloud customers.
- Microsoft saw the writing on the wall last year and was quick to integrate AI functionality across a broad cross-section of its most widely used productivity tools.
Each of these companies is approaching AI in a way that best serves its existing business, and each will likely continue to profit as these secular tailwinds gain momentum. Furthermore, the widespread use of AI has only just begun, so it follows that the gains will continue as adoption increases.
From a valuation standpoint, each of these stocks is relatively inexpensive, depending on your metric of choice. Meta and Microsoft currently sell for 24 and 32 times forward earnings, respectively, making them the clear favorites. Amazon currently sells for roughly 2 times forward sales, which makes it dirt-cheap. By most metrics, Nvidia appears expensive. However, on a forward price/earnings-to-growth (PEG) ratio basis -- which factors in expected growth -- Nvidia is valued at less than 1, the benchmark for an undervalued stock.
Whatever your favored metrics, there's a clear argument to be made that each of these stocks is not only inexpensive, but will continue to benefit from the tailwinds of AI.
