The "Magnificent Seven" stocks have dominated investing headlines recently, as this exclusive group of megacap companies are in a league of their own and have mostly delivered strong performance recently.
While Nvidia (NVDA 6.18%) has certainly been the most exciting Magnificent Seven stock to watch so far in 2024, and Microsoft (MSFT 1.82%) and Apple (AAPL -0.35%) have been in a two-way race for the title of the largest market cap in the U.S. stock market, I wouldn't be surprised if the best performer in the Magnificent Seven over the next five to 10 years was Alphabet (GOOGL 10.22%) (GOOG 9.96%)
The two sides of Alphabet
Alphabet is best known for its Google subsidiary, and for good reason. In addition to the Google Search business, which is dominant in its industry, Google also has Gmail, Maps, Chrome, YouTube, and the Android mobile operating system, just to name a few. These collectively are known as the Google Services business. In fact, I've used four different Google products in the process of writing this article. This is a massive business that generates a ton of reliable, high-margin income.
The other main part of the business is Google Cloud, which is a cloud infrastructure provider that competes with Amazon (AMZN 3.43%) Web Services and Microsoft's Azure. It has the number three market share right now but is growing fast.
Alphabet could be a big long-term winner
Alphabet makes most of its money from ad sales, especially on the Google Services side of the business, and there could be more potential for growth here than it seems. Thanks to evolving AI technology, Alphabet is continually getting better at targeting ads more effectively, which inherently makes them more valuable. Plus, while there is certainly limited growth potential in its search business, that's not the case for some of Alphabet's other ad-driven platforms, such as YouTube.
Google Cloud is definitely the more interesting part of the business from a growth perspective. It makes up less than 11% of the company's total revenue today, but is also the fastest growing part of Alphabet, with 26% year-over-year revenue growth in 2023. In fact, as recently as 2018, Google Cloud made up just over 4% of the company's total sales.
This could just be the starting point. The cloud computing market is estimated to be $676 billion in size today but is expected to roughly quadruple to $2.3 trillion by 2032. If Google Cloud can simply maintain its market share, this could be a big growth driver, but recent data indicates that Google Cloud is gaining on the market leaders.
Tremendous profitability and a reasonable valuation
It's also worth noting that Alphabet has about $111 billion in cash and short-term investments on its balance sheet, which combined with the more than $80 billion in annualized net income it generated in the most recent quarter gives it tremendous financial flexibility to pursue opportunities as they arise.
With a valuation of about 22 times forward earnings, I wouldn't exactly call Alphabet a cheap stock, although it is easily the cheapest of the Magnificent Seven by this metric. However, it does seem attractively valued for a market-leading and highly profitable business growing revenue at a double-digit rate. Alphabet is a rare combination of a dominant core business and a rapidly growing secondary business with massive, long-tailed growth potential. And while it isn't the largest stock in the Magnificent Seven today, I wouldn't be at all shocked for that to change within the next several years.
