With a wide variation in valuation multiples and growth prospects, the Magnificent 7 group of mega-cap tech stocks is one of the most intriguing parts of the equity market to look at.
By all accounts, these seven companies drive a significant percentage of the entire returns of most indices. As such, they deserve the microscope investors place on these names.
And with many passive and active investors alike holding significant exposure to these companies if they hold nearly any index exchange traded fund (ETF), balancing out this overweight exposure can be difficult. For those looking to create their own unique diversified portfolio of stocks (via stock-picking, a strategy I’d argue should likely come back in vogue thanks to the over-representation of these stocks in the broader market), picking three of seven may sound like an easy task.
It’s harder than it looks. That said, here are my three top picks of the group, and why I think they’re poised to outperform over the long-term.
Alphabet (GOOG)
With Warren Buffett recently adding Alphabet (NASDAQ:GOOG) to his equity portfolio within Berkshire Hathaway (NYSE:BRK-B), investors are clearly eyeing this stock much more closely. That certainly makes sense to me.
Alphabet’s incredibly strong recent results have bolstered its investment thesis, even among those who have held this stock long-term. With surging revenue from the company’s core cloud and search businesses, Alphabet’s ability to integrate AI into its existing operations has many excited about the potential for a re-acceleration of both top and bottom-line earnings moving forward.
Indeed, Alphabet’s revenue growth of 16%, driven by 33% growth in the company’s cloud sector and a similar rise in search has investors expecting outsized future beats and raises in coming quarters. With other key drivers, from the company’s autonomous driving division Waymo to its key AI large language model Gemini, there’s plenty for investors looking for the company’s “next big thing” to jump on.
To top it off, Alphabet’s valuation (the best of its Magnificent 7 peers on most metrics, and the reason Buffett and his team likely stepped into this name) stands out as a key reason for growth investors to consider GOOG stock here. I think this pick could be the best of the bunch, at least right now.
Meta Platforms (META)
Social media giant Meta Platforms (NASDAQ:META) continues to be another one of my top mega-cap tech picks in this current market.
Despite concerns that have surfaced once again around AI spending levels (remember the debacle around Zuckerberg going “all-in” on the metaverse?), Meta’s underlying fundamentals are among the strongest of its peer group. With an operating margin of around 40%, and an impressive ability to monetize the billions of eyeballs that grace the company’s various social media sites on a daily basis, there’s plenty of reason to think that both revenue and earnings growth could continue to come in at a market-beating rate for years or decades to come.
Indeed, at Meta’s current valuation, that appears to be what the market is pricing in. The tech giant has made it clear its core leadership team is not scared of making very long-term investments in areas of the economy other companies don’t have the resources, patience or gall to pursue. That’s something enticing to growth investors chasing true innovation.
We’ll have to see what ultimately comes from Meta’s bets on reality labs, and its AI-related investments. For now, I think adding exposure to this cash cow with 4 billion eyeballs across all its platforms is a bet worth making.
Netflix (NFLX)
Following a 10-for-1 stock split, Netflix (NASDAQ:NFLX) has been among the best performers of its Magnificent 7 peer group, at least lately.
Again, while a stock split doesn’t change anything about Netflix’s fundamentals, it does help broaden the company’s investor base and allow for more capital to flow into this stock directly. Existing investors are clearly cheering this news, for a company that’s already benefiting from very robust underlying growth trends.
This past quarter, Netflix reported revenue growth of 17% year-over-year, as the company’s operating margins continue to hover around 30%. With plans to release 1,000 new original titles every year, the expectation is that Netflix’s dominant market position in the world of streaming could actually expand.
With other investments into gaming, and an underlying algorithm many may view as a predecessor to LLMs and the current AI landscape which has benefited other large tech players, this is a company that’s utilized technology to advance its business model in perhaps more of a robust way than some of the AI players we’re seeing pop up in the market today.
Despite being the most highly-valued company on this list, I do think Netflix’s future growth profile justifies its valuation. Those thinking long-term may be best-served by owning this group, though any investor with exposure to a passive index ETF will own their fair share indirectly.