Prediction: These “Magnificent Seven” stocks will remain excellent AI buys despite the selloff

Artificial intelligence (AI) has captivated investors since ChatGPT burst onto the scene with its viral popularity in early 2023. Since then, major tech companies, often referred to as the “Magnificent Seven” stocks, have managed to meet massive AI investment and expectations increasing growth. which drove the broader stock market to new highs.

Lately, however, volatility has crept back into the markets and many of these top guys have been selling off their highs.

Remember that volatility is a feature of investing, not a bug. No one knows what stock prices will do in the short term, but the selloff could be a great long-term buying opportunity for the right stocks.

Which Magnificent Seven stocks should investors focus on? Here’s a prediction: Meta platforms (META -1.84%) and Microsoft (MSFT -0.61%) they will appear as AI stocks that everyone wishes they had bought during this sale.

Here’s why.

The meta has the inside track in the AI ​​race

Social media giant Meta Platforms arguably has everything a company needs to build a dominant business around artificial intelligence (AI). You need a lot of data to train AI models, and Meta has tons of raw data about the 3.27 billion people who log into Facebook, Instagram, WhatsApp, or Threads every day.

AI models require tons of computing power. Nvidia has enjoyed tremendous success as a core supplier for AI chips. Meta has amassed nearly 600,000 of Nvidia’s flagship H100 GPUs and is designing its own custom chip.

Finally, Meta developed its own AI models. Llama is Meta’s big language model, which it implements in its applications and makes available to other developers to build on. Add it all up and Meta is building an AI ecosystem over which it has complete control.

Not many AI technology companies can do it all like Meta can. For example, Nvidia chips serve a specific purpose in AI: computation. Apple has excellent distribution across iOS devices, but sought help from OpenAI’s AI models. Alphabet has similar advantages to Meta, but faces regulatory scrutiny for its monopoly over Internet search.

The best part about Meta is that it’s already a great business that AI makes even better. Meta, already a force in digital advertising, has launched AI tools for clients that increase ad effectiveness by helping to match ads to target audiences. Ad impressions were up 10% year-over-year in Q2, but cost per ad was also up 10%. Meta already generates $150 billion in annual revenue, and analysts believe it will grow by double digits over the next four years.

Investors should view any selloff as a long-term buying opportunity. The stock’s valuation already looks reasonable, so investors need not be too picky. The stock trades for about 25 times Meta’s estimated 2024 earnings, and analysts believe those earnings will grow at an annual rate of 19% over the next three to five years. The resulting PEG ratio of 1.3 signals that the stock is on the cheap side of expected earnings growth, so this is a dip worth buying.

Demand for AI will boost Microsoft’s cloud business

Microsoft is seemingly everywhere in technology, and AI is no different. The company is planting deep roots in AI, including its exclusive partnership with OpenAI, its Azure cloud platform to meet the computing needs of AI, and essential enterprise software that gives Microsoft direct access to millions of customers around the world. Cloud is already Microsoft’s most significant and fastest-growing business unit, and AI could continue to fuel explosive growth.

Microsoft’s close ties with OpenAI include routing the entire process through Azure. In other words, anyone using OpenAI products is technically powering those applications through Azure.

That growth is already trickling down to Microsoft’s cloud business. Driven by AI demand, management reported that Azure’s year-over-year growth beat Wall Street expectations in Q2. Management noted on the call that it would have grown more, but there was more demand for AI than available computing capacity. Microsoft is aggressively investing in data centers and AI chips to increase this capability, which should translate into more revenue and earnings in the coming years. Powerful AI execution could help push Azure closer to AmazonAWS in the global market. AWS is the top cloud, but Azure’s market share rose to 25% in Q1, an all-time high.

Microsoft’s AI positioning and reputation as a blue-chip tech stock have given the stock a high price. The stock’s forward P/E ratio of 32 is a bit high for a business that analysts estimate will grow earnings at an annualized rate of 15% over the next few years. A high-quality company like Microsoft can stay expensive for a long time because most investors know and appreciate how great a stock it is. Selling would be an excellent chance to get shares at a fair price.