This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- All of the "Magnificent Seven" stocks now have market caps of at least $1 trillion.
- Despite these companies' massive sizes, many Wall Street analysts think some of their shares have meaningful upside.
- The key for the hyperscalers is whether or not they will be able to monetize their large AI investments.
Despite periods of turmoil in the stock market this year, most of the "Magnificent Seven" stocks have stayed hot. Those tech-focused megacaps have histories of generating strong earnings and free cash flows, and they're all investing heavily in artificial intelligence (AI). Many investors expect them to be the primary beneficiaries of the AI revolution, which helps explain why their market caps have all now surpassed $1 trillion.
Despite their sheer size, some Wall Street analysts still foresee their shares making big moves upward. According to certain analysts, these two Magnificent Seven stocks could rise by 31% and 19%, respectively, over the next year.
Microsoft: Reaping the rewards of AI investment
There was a time when investors had questions about Microsoft's (NASDAQ: MSFT) investments in artificial intelligence. But recent quarters have largely put those doubts to rest, and Microsoft's stock has risen about 20% so far this year. In the company's fiscal 2025 fourth quarter (which ended June 30), Microsoft's Azure and other cloud services division, which houses a lot of its AI offerings, generated astounding revenue growth of 39% year over year.
"Cloud and AI is the driving force of business transformation across every industry and sector," said CEO Satya Nadella in Microsoft's latest earnings release.
Following the earnings release, Truist Securities analyst Joel P. Fishbein Jr. issued a research report, maintaining a buy rating on Microsoft and raising his price target on the stock to $675, forecasting a gain of about 31% over the next 12 months. Fishbein thinks the tech giant will continue to see strong growth from its cloud business, as well as tailwinds in the broader AI ecosystem. "Sustained strong cloud growth at scale & growing AI demand capture can lead to at least low teens double-digit rev, profit & CF (cash flow) growth over an extended period, while consistently returning cash via divs/repurchases," he wrote.
Microsoft has been able to monetize AI by integrating AI models from OpenAI and charging clients that use these templates. Additionally, Microsoft sells its Azure clients enterprise AI tools through Azure Foundry that allow them to build and implement AI chat, conversational AI, and AI agents, among other tools. Further growth is likely as AI begins to spread to more parts of the economy and different types of businesses across sectors.
Though it can be hard to gauge how much more room for growth a company with a more than $3 trillion market cap might have, I don't have any issue recommending Microsoft to long-term investors. In addition to AI, the company has a tremendous slate of businesses, including its popular suite of office productivity software, its traditional cloud business, video games, and social media platforms. Plus, Microsoft is one of the only companies with a debt rating higher than the U.S. government.
Alphabet: Overcoming challenges all year
It's been a tremendously volatile year for Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). Toward the end of 2024, a federal judge sided with the Department of Justice in a lawsuit, agreeing that the Google parent had employed monopolistic practices to protect its domination of the search engine space, as well as in its digital advertising practices.
The Justice Department then asked U.S. District Judge Amit Mehta to make Alphabet divest itself of its Google Chrome unit, a key element of the company's search business, which drives over half of Alphabet's revenue. But recently, Judge Mehta ruled that the company would not have to do this.
Furthermore, Mehta said Alphabet can continue to pay distributors like Apple to make Google the default search engine on their web browsers. Alphabet reportedly paid Apple over $20 billion in 2022 to make it the default engine on the Safari browser, which is installed standard on all iPhones. However, Mehta said that exclusive contracts will not be allowed and that Google would have to share some of its search data with rivals. Overall, investors considered this a positive outcome for Alphabet.
Many were also concerned earlier this year that AI chatbots like OpenAI's ChatGPT might significantly cut into Google's search business. However, the AI Overviews results powered by Google Gemini that now top the responses to most Google search queries appear to be making progress and meeting the needs of consumers. Evercore ISI analyst Mark Mahaney said the judge's ruling had removed a clear overhang on the stock, which will allow investors to focus on the company's fundamentals.
"What we see is a Core Catalyst, with Google Search revenue growth likely to remain DD% [double digit] for the foreseeable future," Mahaney wrote in a research note. While generative AI will undoubtedly continue to provide competition, Mahaney believes Google's ability to innovate will keep its search engine competitive and allow the company to continue to generate solid growth. His new 12-month price target on Alphabet stock is $300, implying about 19% upside from current levels.
I largely agree with Mahaney, although I think investors should monitor competition from the likes of ChatGPT. But Alphabet also has many other strong and growing businesses, among them its cloud business, YouTube, its Waymo self-driving vehicle unit, and even its own AI chip design business. Even after its big run-up, Alphabet still trades at about 24 times forward earnings. Given that the company's relevance is unlikely to fade any time soon, at that level, it looks like a good long-term buy.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
