Photo credit: www.fool.com
The Nasdaq-100 comprises 100 of the largest nonfinancial corporations listed on the Nasdaq stock exchange. Over the past ten years, it has achieved a remarkable return of 343%, significantly outpacing the more diversified S&P 500, which has seen half that gain. This success can largely be attributed to its heavy weighting towards major technology firms, which dominate today’s economy.
However, the Nasdaq-100 is also known for its volatility in uncertain market conditions. Currently, it is experiencing a correction phase, having declined by 13% from its recent high. Notably, the “Magnificent Seven”—a term used to refer to seven key tech giants—are at the forefront of this downturn. These companies have historically outperformed the broader market but are currently facing challenges. Below is a list of these major players along with their latest market capitalizations:
Apple: $3.1 trillion.
Microsoft: $2.8 trillion.
Nvidia: $2.8 trillion.
Amazon: $2.1 trillion.
Alphabet (GOOGL 1.68%) (GOOG 1.75%): $2 trillion.
Meta Platforms (META 2.96%): $1.5 trillion.
Tesla: $770 billion.
This article will delve into two of these companies—Meta Platforms and Alphabet—focusing on their relatively attractive valuations and their potential to leverage emerging trends, particularly in artificial intelligence (AI). Both stocks have recently seen declines of 19% and 21%, respectively, from their record highs. As such, there is a compelling case for considering them as potential buys during this pullback.
1. The case for Meta Platforms
Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp, facilitates communication for over 3.3 billion users daily. The company’s primary revenue source is advertising, with its income closely tied to the volume of ads served to users.
With nearly half of the global population using its platforms, expanding its user base has become increasingly challenging for Meta. Consequently, the company is prioritizing user engagement, utilizing AI to refine its content recommendation systems. These systems aim to present users with content tailored to their preferences, thereby increasing the time spent on its platforms.
According to CEO Mark Zuckerberg, this strategy has yielded a year-over-year increase in user engagement—an 8% rise for Facebook and a 6% increase for Instagram by late 2024.
Moreover, Meta has introduced new products to enrich user interaction, including an AI chatbot called Meta AI, which is integrated across its platforms. As of late last year, Meta AI boasted over 700 million monthly active users, positioning it among the world’s most widely used chatbots.
Meta AI is powered by the Llama series of large language models (LLMs), which are open-source and have garnered significant adoption, exceeding 600 million downloads. This collaborative approach allows for quick updates and improvements, contributing to the models’ strength in the market.
Looking ahead, Zuckerberg anticipates that the forthcoming Llama 4 will surpass many leading closed-source models, such as those from OpenAI. If successful, this could enhance Meta AI’s capabilities, attracting new users and presenting additional revenue opportunities.
In 2024, Meta achieved a historic revenue of $164.5 billion, marking a 22% increase from the previous year, with earnings per share (EPS) soaring 60% to $23.86. Remarkably, this results in a price-to-earnings (P/E) ratio of 24.7, making Meta one of the more affordable options among the Magnificent Seven, with Alphabet being the only one priced lower.
Considering its robust financial performance and leadership in AI, the recent 19% drop in Meta’s stock price presents a compelling long-term buying opportunity for savvy investors.
2. The case for Alphabet
Alphabet, the parent company of Google, YouTube, and Waymo, the self-driving technology developer, relies heavily on Google for its revenue, especially through its advertising platform linked to its search engine.
In recent years, AI-driven chatbots have posed challenges to Google Search’s preeminence, offering a new method for users to access information. In response, Alphabet has committed significant resources to AI development, ensuring Google retains its dominant 90% market share in search services. Last year, Alphabet introduced AI Overviews, a feature that presents users with AI-generated responses at the top of search results.
This innovation combines text, images, and links to provide users with comprehensive information, streamlining the search experience. Alphabet claims these Overviews match the revenue-generating capabilities of traditional search results, and interestingly, they have reportedly encouraged more frequent searches, enabling users to engage in deeper, more specific queries.
Alphabet’s Gemini LLMs power these Overviews and underpin various AI initiatives, including a stand-alone Gemini chatbot and an embedded assistant in Google Workspace applications like Gmail and Docs.
Additionally, Alphabet’s Google Cloud segment is the fastest-growing part of its business, attracting companies and developers in need of advanced data center solutions. This segment’s growth reflects heightened demand for AI training capacities, with Google Cloud’s AI developer platform, Vertex AI, seeing a fivefold increase in customer engagement last year.
The overall momentum behind Alphabet’s AI initiatives is notable, particularly in light of its recent stock price decline of 21%. Typically, when a company’s fundamentals improve but its stock performance lags, it signifies a strong opportunity for investors.
For 2024, Alphabet reported an impressive 38% increase in EPS, reaching a record $8.04. This performance brings its stock’s P/E ratio down to 20.2. As the most reasonably priced among the Magnificent Seven, Alphabet is also 32% cheaper than the overall Nasdaq-100 index, which is currently trading at a P/E of 29.8.
Despite ongoing regulatory challenges, Alphabet’s stock may represent an appealing long-term investment opportunity, especially following its recent price drop.
It is worth noting that Randi Zuckerberg, former director at Facebook and sister to Meta CEO Mark Zuckerberg, serves on The Motley Fool’s board, alongside other executives from various tech giants. The Motley Fool maintains positions in and recommends several of these companies. However, individual investors should conduct their own research before making investment decisions.
Source
www.fool.com