This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

So you may be surprised to learn that Microsoft pays more dividends (in terms of total cash spent) than any other S&P 500 company -- even more than Apple, JPMorgan Chase, and high-yield behemoths like ExxonMobil, Chevron, Johnson & Johnson, and Verizon Communications.

In fiscal 2025, which ended on June 30, Microsoft spent $18.42 billion on stock buybacks and $24.08 billion on dividends. In September, Microsoft announced a 10% dividend raise, marking its 16th consecutive annual increase.

Despite only yielding 0.7%, here's why Microsoft is an excellent dividend-paying growth stock for long-term investors to buy now. 

Microsoft is an underrated dividend stock

One of the biggest mistakes dividend investors make is overly focusing on a stock's forward dividend yield, which is the return you can expect to make from the stock's annualized dividend, divided by its current stock price. Forward dividend yield is useful, but limited. It's merely a snapshot of a dividend yield at a moment in time. It doesn't accurately reflect a stock's true passive income potential, which is more closely tied to the dividend growth rate.

The best dividend-paying growth stocks are companies that consistently growth their earnings, and in turn, can justify paying a higher dividend expense. And if investors are confident that earnings can continue rising, the stock price should go up over time. There's even an elite group of companies known as Dividend Kings that have raised their payouts annually for over 50 consecutive years -- like Coca-Cola.

Microsoft is the fourth most valuable company in the world and has produced monster gains for long-term investors. But it has also become a passive income powerhouse.

If you had bought Microsoft 10 years ago for around $56 per share, your yield on cost would be 6.5%. Yield on cost takes the annualized dividend and divides it by the price you paid for the stock, rather than its current price, which better represents the dividend income generated based on your initial investment.

The issue with forward dividend yield is that it punishes high-performing stocks and rewards underperforming stocks. Many of the highest-yielding companies in the S&P 500 are stocks that have gone down in price in recent years, rather than companies that are rapidly raising their dividends.

By comparison, Microsoft has increased its dividend by over 250% over the last decade, but the stock price has gone up even more, so the yield has dropped -- overshadowing Microsoft's commitment to its dividend.

What's more, Microsoft also buys back a ton of stock -- far more than it pays in stock-based compensation. Like dividends, stock buybacks are a lever companies can pull to return capital directly to shareholders. If buybacks are larger than stock-based compensation, the outstanding share count will fall. And with fewer shares to go around, earnings per share will rise faster than net income, making the stock a better value for long-term investors.

Microsoft's spending is bold, but controlled

Microsoft is the most balanced Magnificent Seven stock to buy for 2026 because it rewards shareholders through a combination of organic growth, dividends, and buybacks. The company has a booming cloud computing business through Microsoft Azure; is a major player in artificial intelligence (AI) through OpenAI (which powers a lot of Microsoft's AI tools); has a massive software, gaming, and personal computing presence; and owns a variety of platforms -- from GitHub to LinkedIn.

But no single segment makes or breaks the investment thesis. Rather, Microsoft has numerous high-margin ways to deploy capital, which can reduce the temptation to bet too heavily on a single idea.

Big tech companies have been in the spotlight for their AI spending, with concerns that the payoff of that spending is uncertain or won't be realized for several years. Microsoft is spending heavily on AI, but not to the point where it's straining free cash flow (FCF).

FCF is a crucial metric for determining the amount of cash flowing in or out of the business. The formula is simply cash flow from operations minus capital expenditures (capex). As you can see in the chart, Microsoft's capex has exploded higher in recent years, but so has its cash from operations. So it is still growing FCF.

Data by YCharts.

However, some companies, like Meta Platforms, are growing capex faster than cash flow from operations, which is leading to lower FCF. Meta still has a phenomenal balance sheet and high margins, but the aggressive spending adds more pressure for investments to pay off.

A foundational stock to buy now

Microsoft's high dividend growth rate and commitment to returning capital to shareholders should allow it to maintain its position as the S&P 500 component with the largest dividend expense for years to come. Investors who buy the stock today will only get a 0.7% yield based on its current price, but they can expect the yield on cost to be much higher in the future as Microsoft raises its payout.

Microsoft's growing dividend, reasonable valuation, and high-margin diversified business make it one of the most balanced stocks to buy and hold, even if there's a stock market sell-off in 2026.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Chevron, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and Verizon Communications and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Welcome to the final article in a seven-part series ranking the best "Magnificent Seven" stocks to buy for next year.

To recap, Tesla was in last place, followed by Apple as the sixth seed, Amazon in fifth, Alphabet fourth, Nvidia third, and Meta Platforms second.

Here's why Microsoft (NASDAQ: MSFT) takes the gold as the best Magnificent Seven stock to buy in 2026, and my top stock from the entire S&P 500 to buy and hold for at least the next three to five years. 

Microsoft is a high-margin cash cow

Microsoft doesn't have as much growth potential as Magnificent Seven names like Nvidia or Tesla. However, what makes it attractive is its ultra high profit margins.

Data by YCharts.

Microsoft is the No. 2 player in cloud computing, behind Amazon Web Services. It features a comprehensive suite of integrated software tools, including Microsoft 365 (Word, Excel, PowerPoint, Microsoft Teams, OneDrive, SharePoint, and AI capabilities through Copilot). Its personal computing products include Surface and Windows-supported devices from a variety of brands. Microsoft owns LinkedIn and GitHub. And it's a major player in gaming with Xbox and its ownership of Activision Blizzard.

Mature tech companies often over-diversify and put innovation on the back burner, leading to slower growth and margin compression. Not Microsoft. Its growth is accelerating, and its operating margin is at a 10-year high.

Delivering results without taking on too much risk

With a 29.8 forward price-to-earnings ratio, Microsoft isn't quite as cheap as Meta Platforms, but it's still reasonably priced within the context of its historical valuation.

Microsoft also has the best track record of the Magnificent Seven for delivering consistent, high-margin growth and returning capital to shareholders through share repurchases and dividends.

Its outstanding share count has been ticking down over the years because buybacks have exceeded stock-based compensation. On Sept. 15, management announced a 10% dividend increase -- marking the 16th consecutive year the company has boosted its payout. It has the highest yield among the Magnificent Seven at 0.8%.

Microsoft also has one of the best balance sheets of the Magnificent Seven, ending its most recent quarter with $66.6 billion in cash, cash equivalents, and short-term investments net of long-term debt.

As flawless as it gets

There are no perfect businesses, but Microsoft is arguably as close as it gets among U.S. companies.

Going into 2026, the investment thesis has no weaknesses. The company is high-margin, diversified, innovative, and benefits from growth trends across the tech landscape, including AI.

That means Microsoft is well positioned, regardless of what happens in the years to come.

If there's a recession, Microsoft can weather it.

If there's a sustained AI boom, it will benefit.

If Microsoft-backed OpenAI loses market share to Alphabet's Gemini or Anthropic's Claude, the company can still thrive.

Microsoft may not produce the largest gains of the Magnificent Seven over the next three to five years, but it is by far the best positioned to consistently outperform the S&P 500 over the long term.

Add it all up, and Microsoft has the potential to be a foundational holding for both growth and value investors alike. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Ranking the best "Magnificent Seven" stocks to buy for 2026. Here's my No. 1 pick. appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Meta Platforms (NASDAQ: META) shares popped 3.4% on Thursday despite a mere 0.22% increase in the Nasdaq Composite on reports that the company was cutting metaverse spending in favor of artificial intelligence (AI) and smart glasses.

Here's why Meta's capital is better used on non-metaverse projects and why the growth stock is a great buy in December. 

The harsh reality of Reality Labs

Facebook changed its name in October 2021 to Meta Platforms to better capture the company's expansion beyond its flagship social media app. A name change was the right move, as Instagram is arguably more valuable than Facebook. Along with WhatsApp and Messenger, the four apps are known as Meta's Family of Apps.

The name change to Meta Platforms reflected an increased emphasis on engaging through virtual worlds -- a far more ambitious digital frontier than the desktop and mobile silos the Family of Apps resides in. The name change was followed by a sharp decline in Meta's stock price, which fell 64.2% in 2022 compared to a 33.1% decrease in the Nasdaq.

The sell-off was due to a decline in Meta's Family of Apps operating income and losses on metaverse, augmented reality, and virtual reality spending, which is under the company's research and development arm, Reality Labs.

Meta's losses at Reality Labs have continued to increase. But its Family of Apps have been the saving grace, as operating income from that segment is more than offsetting mounting losses at Reality Labs.

Data source: Meta Platforms.

Family of Apps is more than absorbing Reality Labs' losses

Since the start of 2023, Meta's stock price is up a mind-numbing 450% compared to a 124.6% gain in the Nasdaq as investors have given Meta the benefit of the doubt due to excellent growth from the Family of Apps.

Yet despite that increase, Meta's profits are increasing at such a torrid rate that it's still the cheapest "Magnificent Seven" stock, a group of tech-focused companies that includes Meta, Nvidia, Apple, Alphabet, Microsoft, Amazon, and Tesla.

As you can see in the following chart, Meta's revenue and earnings have exploded higher in recent years. And even when factoring in Reality Labs losses, Meta's operating margins are still sky high at 43.3%.

META Revenue (TTM) data by YCharts

Looking at the nine months ended Sept. 30, Meta generated $139.8 billion in Family of Apps revenue and $71.7 billion in Family of Apps operating income. This means that without the Reality Labs drag on profitability, Meta's advertising revenue operating margin would be 51.3%.

For context, Nvidia, which is an ultra-profitable company with customers lining up out the door for its graphics processing units, has trailing 12-month operating margins of 58.8%. This goes to show just how much of a cash cow Family of Apps is.

Meta's investment thesis just got even better

Meta's decision to cut back on metaverse spending in favor of AI and its Family of Apps is excellent news for long-term investors, especially value investors who are interested in Meta for its high free cash flow, impeccable balance sheet, and growing dividend. Before getting too excited about the news, investors may want to hear commentary directly from CEO Mark Zuckerberg and the rest of the Meta management team to ensure that the strategic shift is lasting and not a temporary change of heart.

The social media giant is investing heavily in AI by building its own data centers, refining its search algorithm to better align content with user interests and connect advertisers with relevant buyers, and developing its Llama large language model to power its Meta AI assistant, among other initiatives. With such a massive opportunity in AI, there's less reason for Meta to continue flooding Reality Labs with capital with no return on investment in sight.

Meta was already one of my highest conviction growth stocks to buy in 2026. This news only makes the investment thesis more attractive, making Meta a screaming buy now. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Let's turn the calendar back six months to early June. 

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) was down over 10% year to date, while the S&P 500 had recovered from the tariff-induced sell-off in April and was roughly flat on the year.

Fast-forward to today, and Alphabet is up 67% year to date, has more than doubled off of its 52-week low, and surpassed Microsoft to become the third-most valuable company in the world behind Nvidia and Apple. In 2025, Alphabet is by far the best-performing "Magnificent Seven" stock, with Nvidia in a distant second place with a 35.1% year-to-date gain.

Here's why Alphabet's rise wasn't a fluke, how you can identify Alphabet-like stocks before they pop, and why Alphabet has room to run in 2026. 

Alphabet was epically mispriced

Finance classes will teach you theories such as the efficient market hypothesis, which essentially posits that asset prices are accurately determined based on available information. In practical application, the hypothesis attributes outsize gains to taking on outsize risks -- effectively discrediting the finding of true value independent of risk in the market.

Alphabet is a prime example of why the hypothesis is incorrect.

Earlier this year, Alphabet got so cheap that it traded at a discount to the S&P 500. It was the least expensive Magnificent Seven stock, despite the company generating substantial free cash flow, achieving steady high-margin growth, repurchasing a significant amount of stock, paying dividends, and maintaining a solid balance sheet.

Simply put, Wall Street failed to price in Alphabet's growth potential and labeled it as an artificial intelligence (AI) loser. That assumption couldn't be further from the truth.

From laggard to leader

Alphabet has a massively diversified business, spanning Google Search, Google Cloud, YouTube, Android, Google services like Gmail and Google Drive, "other bets" like Waymo and Google Fiber, research and development arm Google DeepMind, and more. But despite all these moving parts, Alphabet still depends on Google Search for over half of its revenue and the majority of its operating income.

Large language models (LLMs) present the greatest threat to Google Search in its history. And for a while, there were fears that tools like OpenAI, Claude, Copilot, DeepSeek, Grok, and others would slowly erode Alphabet's once-dominant share of the search market. If queries shifted from web-based text links to conversational, that would disrupt the very fabric of Google Search's identity.

Instead of sitting on its hands and letting the LLM wave weather its once-impenetrable moat, Alphabet integrated its model, Gemini, into Google Search, as well as a stand-alone app. Rather than reinvent the wheel, Alphabet essentially upgraded Chrome with AI features, making it more powerful and providing an incentive for users to stay on the platform instead of switching to a different tool entirely.

The strategy worked. Google Search continues to grow despite upgrades from rival LLMs. Alphabet is generating all-time-high earnings and investing heavily in long-term projects, including the expansion of Google Cloud infrastructure. Alphabet is thriving and is far from being a legacy tech giant, with its best days in the rearview mirror. And yet just six months ago, the market was pricing Alphabet like a washed-up relic.

Engagement continues to rise on Gemini -- with the app surpassing 650 million monthly active users.

As an added vote of confidence, Berkshire Hathaway announced a stake in Alphabet -- marking a stark contrast from quarter after quarter of trimming its Apple position -- indicating Warren Buffett and his team perceive Alphabet as a good value.

Meta Platforms is considering purchasing Alphabet's Tensor Processing Unit (TPU) chips, which Alphabet developed with Broadcom. Custom-made TPUs are a cost-effective solution for data centers, offering a more affordable alternative in certain applications than graphics processing units, such as those manufactured by Nvidia or Advanced Micro Devices.

Flipping the script

Alphabet's investment thesis has evolved, but the bigger change impacting its stock price is perception. Now, the market views Alphabet as a leader in search through its reimagined Chrome and Gemini. Google's TPUs are recognized as a leading method for training AI models, opening a new revenue stream for Alphabet by selling TPUs to hyperscalers.

Alphabet is a textbook example of the upside potential that comes with investing in dirt cheap growth stocks rather than simply betting big on red-hot highfliers. When growth expectations are virtually nonexistent, a company doesn't have to do much to garner a favorable response from Wall Street.

If we examine Alphabet's timeline over the last six or so months, I would say that a significant change occurred in late summer and fall, when Alphabet began to be recognized as a major player in AI rather than a laggard. The recent run-up over the last few weeks is attributed to a positive response to Gemini 3, which was announced in mid-November, and news that Meta was interested in buying TPU chips.

These announcements are undoubtedly great news for Alphabet investors, but they didn't emerge from nowhere. Alphabet's Google Search and Gemini results have been exceptional for several quarters. Alphabet and Broadcom's seventh-generation TPU is 30 times more powerful than the first cloud TPU from 2018. But still, the partnership has been going on for a while now.

Alphabet remains a solid buy now

Alphabet has room to run in 2026 because its valuation is still reasonable at 30 times forward earnings. With multiple levers to pull to grow earnings, Alphabet is a balanced buy now. But it isn't the dirt cheap value stock it used to be. Now, Alphabet is at a similar valuation to peers like Microsoft and Amazon, and more expensive than Meta Platforms.

All told, Alphabet is a great example of why there's a lot of money to be made in the stock market if you can find quality companies that are mispriced because fears are overshadowing fundamentals and growth potential.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Here's why Alphabet is the best-performing "Magnificent Seven" stock in 2025 (and why it has room to run in 2026) appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This is part three of a seven-article series in which I rank the best Magnificent Seven stocks to buy for 2026 (in reverse order). Tesla came in last place, followed by Apple in the sixth spot -- as both stocks are not worth buying right now.

Amazon marks a turning point. Although it's my fifth pick, I would categorize Amazon as a decent, but not a high-conviction buy for 2026. Here's why.

AWS or bust

Amazon soared after its latest earnings report, as its cloud computing services segment -- Amazon Web Services (AWS) -- delivered impeccable results. This was a sigh of relief, as AWS had been growing slower than peers like Microsoft Azure and Google Cloud.

Amazon began by selling books online and eventually became the world's largest online retailer. But today, AWS is the company's crown jewel. The segment continues to drive Amazon's cash flow and overall profitability, making up for what can be lackluster results in its other segments.

Amazon's dependence on AWS is a key reason why the stock isn't higher on my list. While AWS is more valuable than any other cloud service, Amazon as a whole is less balanced than Microsoft and Alphabet.

If cloud computing growth slows, Microsoft can rely on its highly profitable software business, growing gaming portfolio, and other strengths. Microsoft is monetizing AI across its business segments, driving sustainable, high-margin growth.

Similarly, Alphabet's Google Search is its centerpiece, but the company is rapidly expanding its Gemini AI assistant app. Despite rival AI-first information resources like ChatGPT, Google Search continues to grow at a solid rate -- fueled by embedding AI overviews powered by Gemini into Google Search queries. Aside from Google Cloud and Google Search -- YouTube, Android, and Google Other Bets, which include Waymo and Google Quantum AI -- round out Alphabet as a balanced, yet high-octane growth stock.

Amazon loves spending money

Another factor that sets Amazon apart from the other Magnificent Seven stocks is its lack of stock buybacks and dividend payments. Amazon hasn't repurchased stock for years. And because it rewards many employees with hefty stock-based compensation packages, Amazon's share count has increased over time, diluting existing shareholders.

By comparison, Apple spends a boatload of cash on buybacks, and Microsoft also actively repurchases stock and pays more dividends than any other U.S. company.

Meta Platforms and Alphabet have been ramping up their buyback programs in recent years and instituted their first-ever dividends last year. And even Nvidia is now buying back significantly more stock than it issues in stock-based compensation, making the stock a better value.

Pouring excess cash back into the business instead of repurchasing stock can accelerate earnings growth. But the strategy is aggressive and risky. Because if Amazon fails to deliver or AWS loses market share, investors will question the capital allocation strategy.

Amazon is an OK buy for 2026

Amazon is a decent buy on the strength of AWS alone. But it's not as compelling as Nvidia, Microsoft, Meta Platforms, or Alphabet.

Find out how I rank those four Magnificent Seven names in my upcoming rankings.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Ranking the best "Magnificent Seven" stocks to buy for 2026. Here's my No. 5 pick. appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia (NASDAQ: NVDA) rocketed as much as 6.5% higher in after-hours trading on Nov. 19 after reporting third-quarter fiscal 2026 results and issuing fourth-quarter guidance.

While some investors may have been focused on the revenue and earnings per share (EPS) beats, the most jaw-dropping number of the report was hiding in plain sight.

Here's what blew me away about Nvidia's recent quarter, and why the artificial intelligence (AI) growth stock remains a great buy now.

Nvidia's revenue growth is mostly profit

Nvidia grew revenue by $21.92 billion compared to the same quarter last year, but the cost of revenue grew by just $6.23 billion, and operating expenses only grew by $1.17 billion.  This means that Nvidia is converting the bulk of additional revenue into operating income.

Despite fears that Nvidia's margins would compress due to competition and increased research and development spending, Nvidia's operating margin was actually higher this quarter than in Q3 of fiscal 2025. More importantly, Nvidia converted a staggering 56% of revenue into after-tax net income.

With $31.91 billion in net income generated in the quarter, Nvidia will likely eclipse Alphabet within the next year as the most profitable U.S. company -- and probably the most profitable company in the world unless oil prices, and, in turn, Saudi Aramco's profits surge.

Nvidia is thriving, but risks remain

Nvidia gets a lot of attention for its stock price, but the performance of the business is what long-term investors should continue to focus on.

There's simply no company in the world remotely close to Nvidia's size that is growing earnings this quickly. The combination of industry leadership, high margins, and technology at the epicenter of AI data centers makes Nvidia a compelling long-term investment.

As for the valuation, Nvidia is priced as if it is going to continue growing earnings by double digits quarter over quarter. For that to happen, its key customers -- the hyperscalers building out data centers and training AI models -- need to keep spending. These hyperscalers must continue to generate strong cloud computing growth from key customers across various sectors. But to do that, compute and AI spending need to be profitable for cloud customers. The whole value chain breaks if end user spending isn't paying off.

As excellent as Nvidia's results are, it would be a mistake to overlook the double-edged sword that Nvidia holds as the undisputed leader in data center computing and networking. Nvidia is the single biggest beneficiary of increased AI capital, but it would also be one of the hardest-hit companies during a critical slowdown.

Fortunately for long-term investors, Nvidia has $60.61 billion in cash, cash equivalents, and marketable securities on its balance sheet, compared to just $7.47 billion in long-term debt. Paired with its ultra-high margins, Nvidia is undoubtedly the best-positioned AI company to ride out a slowdown.

Nvidia is still a buy

Nvidia is the poster child of today's top-heavy, premium-priced market. What separates Nvidia is that the stock's run-up is supported by solid fundamentals, whereas other pockets of the market have valuations that are arguably overextended.

All told, Nvidia is still a good buy for investors who believe in a sustained ramp-up in hyperscaler AI capital expenditures.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet and Nvidia. The Motley Fool Australia has recommended Alphabet and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, and Tesla (NASDAQ: TSLA) form an elite group of companies known as the "Magnificent Seven" due to their industry leadership and market influence.

As many of these companies continue to deliver market-beating returns, the Magnificent Seven now comprise a remarkable 35% of the value of the S&P 500. 

In a series of articles, I'll be ranking each of these stocks and discussing why some are still chock-full of untapped potential, while others should be avoided by investors.

Here's why Tesla is my least favorite of the bunch to buy in 2026. 

Tesla's core business growth is slowing

If Tesla can effectively monetize some of its larger bets, such as its planned Robotaxi network, its humanoid robots, or its other artificial intelligence (AI) endeavors, it could easily be the single best Magnificent Seven stock to buy and hold for the next five to 10 years.

But that's a big "if."

The major difference between Tesla and the other Magnificent Seven companies is that its core business is struggling.

By comparison, revenue growth remains strong for Apple's iPhone and services categories. Amazon Web Services generates gobs of free cash flow that funds the company's other ambitions. Alphabet and Microsoft each generate sizable earnings from a variety of digital segments, including cloud computing infrastructure, where they're both major players. Meta Platforms has its highly profitable "family of apps" segment, which brings in more than enough to support its billions of dollars in losses from Reality Labs, which contains its metaverse-related operations. And Nvidia's compute and networking segment continues to deliver jaw-dropping results, while its smaller segments are also highly profitable.

By contrast, Tesla's electric vehicle (EV) deliveries were trending downward in the first half of 2025, though it remains the market leader. Its energy storage business is on firmer footing, but it makes up a small part of the top line. In the third quarter, Tesla grew automotive revenue just 6% year over year as deliveries rebounded, up 7%. However, the company's operating margin fell to just 5.8% -- a steep decline from 10.8% a year earlier.

Tesla is spending a ton of money on artificial intelligence and robotics, but it has yet to see a payoff from those investments.

This past summer, Tesla launched its autonomous ride-hailing service in Austin, Texas, and it has since expanded it to a few other markets, including the San Francisco Bay Area. However, it remains to be seen how profitable it will be at scale.

It's also worth noting that, so far, that service is being provided by standard Model Y EVs that have been outfitted with Tesla's Robotaxi technology, not the much-discussed Cybercab, which is not yet in production. And in most markets, regulators are still requiring human monitors for those autonomous vehicles.

There are better buys than Tesla for 2026

Tesla's Robotaxis feature pioneering-edge AI, which presents distinct challenges compared to embedding AI within smartphones or personal computers, so the company deserves credit for making progress in that field.

However, the risks of investing in Tesla simply aren't worth the potential rewards at this time, especially given the fact the stock is trading at 178 times expected 2026 earnings.

Since Tesla's valuation appears to be increasingly disconnected from its core EV business and based more on the potential of new ventures that have yet to prove themselves, investors may want to take a "wait and see" approach to the stock at this time. There are many other compelling buys in big tech.

Stay tuned to find out how the remaining Magnificent Seven stocks stack up in my rankings for 2026.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

With a share price over $1,100 and a decade since its last split, many investors have been wondering if Netflix (NASDAQ: NFLX) would split its stock in 2025 or 2026. And sure enough, the speculation ended on Oct. 30 when Netflix announced a 10-for-1 stock split, which was followed by a favorable reaction in Netflix's stock price on Oct. 31.

Netflix and nine other companies make up the "Ten Titans," which are 10 influential growth stocks that account for over 40% of the S&P 500. These industry-leading companies have crushed the broader market in recent years, and some have room to run even higher.

Here's why Netflix remains a top Titan to buy now, and the impact of the stock split on Netflix shareholders and potentially the Dow Jones Industrial Average. 

Why stock splits matter

After the close of trading on Friday, Nov. 14, Netflix shareholders as of record on Nov. 10 will receive nine additional shares for every share held, with split-adjusted trading commencing at market open on Nov. 17. In other words, the size of the pie isn't changing. Instead, it will be cut into 10 times more slices.

Stock splits don't impact a company's value or change the underlying investment thesis. However, they aren't meaningless.

In its press release, Netflix said, "The purpose of the stock split is to reset the market price of the Company's common stock to a range that will be more accessible to employees who participate in the company's stock option program." Having a lower share price also makes it easier for individual investors to trade options on Netflix, since options are usually in 100-share increments. With a share price over $1,000, it would take over $100,000 in a cash-supported account to sell an option on Netflix.

A stock split can also increase a company's chances of getting added to the Dow. Amazon, Nvidia, and Sherwin-Williams were added to the Dow in 2024. And all three companies split their stocks in the last few years. With the median stock price in the Dow around $250 per share and a max price under $800, there's next to no chance that Netflix would be considered without splitting its stock because a price over $1,000 would significantly alter the dynamics of the price-weighted index. Granted, it's unlikely Netflix would be added anyway, since that would probably involve replacing Walt Disney. But the stock split does boost Netflix's chances.

Some consider all Dow companies to be blue chip stocks, even if they don't pay dividends. So being added to the Dow would cement Netflix's industry leadership and make it a core member of all four major indexes -- the S&P 500, Nasdaq Composite, Russell 2000, and the Dow.

Stock splits matter less today than in years past due to the widespread availability of fractional shares and low-cost trading. Fractional shares allow investors to commit a dollar amount in a stock rather than invest in per-share increments. And many brokerages offer zero-cost trading. In the past, stock splits made a big difference by lowering the entry point for individual investors -- effectively leveling the playing field and taking away an advantage previously held by institutions with multimillion-dollar portfolios.

Netflix is a high-conviction buy

Netflix's stock split is a vote of confidence that management believes the company has a long runway for earnings growth. The 10-for-1 ratio is a bit surprising as well. Last month, I predicted Netflix would issue a 7-for-1 split. But a 10-for-1 split puts the share price close to $100, which isn't necessarily a big deal, except that a big drop would push the stock price into double digits, which some investors view as a psychological barrier. Some institutions avoid investing in stocks below a certain price -- especially once they get in the single digits. So the 10-for-1 split is a signal from Netflix to Wall Street that it expects the stock price to go up over time.

Netflix hasn't been shy about valuation-based targets. Management set an internal goal to reach a $1 trillion market cap by 2030 and grow operating income faster than revenue -- thereby expanding operating margins. Netflix's market cap currently sits below half a trillion, mainly because the stock nosedived after its latest earnings report. Netflix took a $619 million charge due to a Brazilian tax dispute. But the operating results were exceptional -- reinforcing why Netflix is a terrific long-term buy.

Netflix continues to steadily increase earnings, expand its margins, and demonstrate pricing power even in an environment where consumer spending is strained. Chipotle Mexican Grill just fell a staggering 18% in 24 hours after announcing its quarterly earnings -- yet another example of consumers tightening discretionary spending on restaurants, goods, and services. By comparison, Netflix's latest quarterly results show that its membership remains a priority for many individuals and households.

A potential dividend-paying Dow stock

On its own, Netflix's stock split isn't a reason to buy or sell the stock, but it does affect how Netflix's employees and investors interact with the stock and improves its chances of one day being added to the Dow.

Instead of buying Netflix for its stock split, a better approach is to focus on the company's impeccable fundamentals. Netflix is a high-margin cash cow that's growing at an impressive rate despite a slowdown in discretionary spending, especially among lower- and middle-income households.

Netflix's global subscriber base allows it to produce expensive, high-quality content while still turning a huge profit. As Netflix matures, I could see the company begin to pay a steadily growing dividend. And if Netflix does eventually surpass $1 trillion in market cap, it may find its way into the Dow. Especially given that post-split, Netflix could double in price and still be right around the median price of a Dow stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Chipotle Mexican Grill, Nvidia, and Walt Disney and has the following options: short November 2025 $120 calls on Walt Disney and short November 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Chipotle Mexican Grill, Netflix, Nvidia, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Sherwin-Williams and has recommended the following options: short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool Australia has recommended Amazon, Chipotle Mexican Grill, Netflix, Nvidia, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The Nasdaq Composite's brutal 3.6% sell-off on Oct. 10 was a painful reminder of how quickly growth stocks can sell off when doubt creeps in. Friday's tumble marked the worst session since April during the height of trade tensions between the U.S. and China.

The sell-off was a reaction to the U.S. threatening an additional 100% tariff on Chinese imports as a retaliation for China's stricter export controls on rare-earth minerals and magnets. These materials and products are used across economic sectors, including semiconductors and technological equipment with artificial intelligence (AI) applications.

On Oct. 12, reports indicated that China would not back down against escalated tariff threats from the U.S.

Investors often talk about buying opportunities when the market is selling off. But it can be just as helpful to be aware of potential mistakes and prevent them before they do damage to your portfolio. Here are three that apply to AI growth stock investors who are preparing for next year. 

1. Having an overly concentrated AI portfolio

A common mistake is to overly focus on one facet of a value chain.

For example, an investor may own Nvidia (NASDAQ: NVDA), Broadcom, and Advanced Micro Devices as a way to diversify across different AI chip designers. The issue is that many of these companies have the same customers. For example, OpenAI is buying chips from all three companies to build out 10 gigawatts of data centers. If OpenAI were to cut its spending, it could affect the earnings of all three companies.

Similarly, equipment suppliers like Applied Materials, Lam Research, and ASML all share the same largest customers -- which are semiconductor manufacturers like Taiwan Semiconductor, Samsung Electronics, and Intel. So if Taiwan Semi cuts its spending, it would reduce earnings across the semiconductor equipment supplier industry.

Further down the value chain are the cloud computing giants like Amazon Web Services, Microsoft Azure, Alphabet-owned Google Cloud, and Oracle. These companies benefit from increased AI spending, but they also serve general computing and storage needs. A slowdown in AI spending, or a widespread economic downturn, could reduce demand for additional cloud computing usage across major corporations.

By building out an AI portfolio across the value chain rather than focusing on one segment, you can help reduce volatility and limit the damage of an industry-specific pullback.

2. Ignoring position sizing

Portfolio sizing and allocation are just as important as the stocks and exchange-traded funds owned. You don't want to be so diversified that your best ideas don't make a big impact, but you also don't want to be overly concentrated to the point where a handful of stocks can damage your financial health.

There's no one-size-fits-all solution to diversification. But factors to consider include investment goals, investment time horizon, and risk tolerance.

A risk-averse investor would probably want to limit the size of a single stock in their financial portfolio, whereas an investor with a high risk tolerance and a multi-decade time horizon may not mind betting big on a handful of stocks, especially if they are still making new contributions to their investment accounts.

3. Buying stocks and not companies

Building a diversified portfolio isn't enough. In fact, it's not even the most important factor.

Arguably, the greatest mistake investors can make when approaching AI is to invest in stocks rather than companies. In other words, focusing too much on price action and potential gains rather than on what a company does and where it could be headed.

Peter Lynch's investment advice to "know what you own, and why you own it," still rings true today. Without conviction, a concoction of emotion and volatility can corrode the foundations of even the strongest portfolios. An investor may hold positions in stocks just because they are going up, even if those gains are temporary, because they don't have to do with the underlying investment thesis.

The best investments are the ones you can put a decent amount of your portfolio into and be confident in owning, even if they suffer an extreme sell-off -- like we saw in April during the height of trade tensions. If someone bought Nvidia just to make a quick buck, they may have been tempted to sell it when it fell by over 37% from its high in early April. Or when it dropped over 55% from its high in 2022. But someone investing in Nvidia for its multi-decade potential in AI data centers would have had an easier time holding the stock throughout these volatile periods.

Unlocking lasting success in the stock market

Diversifying across the AI value chain in companies you understand and with an awareness of portfolio sizing can help you build a portfolio that's built to last, rather than one that can get hot only if the conditions are right.

Long-term investors know that success is more about making consistently good decisions over an extended period, rather than a few great ideas wedged between mediocrity and mistakes.

AI stocks have generated monster returns for patient investors, and many have the potential to create lasting generational wealth going forward. But those gains could take time, with many bumps along the way.

No one knows when the next major stock market sell-off will occur. Instead of guessing the timing and severity of a sell-off, it's better to put your effort into following great companies and limiting mistakes.

In sum, diversification, conviction, and good companies are components that can help you build an investment suspension system capable of absorbing sell-off shocks. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in ASML and Nvidia and has the following options: short November 2025 $820 calls on ASML. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ASML, Advanced Micro Devices, Alphabet, Amazon, Applied Materials, Intel, Lam Research, Microsoft, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2025 $21 puts on Intel. The Motley Fool Australia has recommended ASML, Advanced Micro Devices, Alphabet, Amazon, Lam Research, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There were a flurry of stock splits last year, including Nvidia, Broadcom, Chipotle, and Walmart, among others. But 2025 hasn't been nearly as active a year for stock splits. 

Here's why Netflix (NASDAQ: NFLX) and Meta Platforms (NASDAQ: META) stand out as top candidates to split their stocks in 2026.

When stock splits make sense

Stock splits provide an opportunity to make a company's shares more accessible to smaller investors with limited capital. While they are less important in today's age of zero-cost trading and fractional shares, companies will still pursue stock splits for other benefits like employee compensation and psychological appeal too.

For example, Berkshire Hathaway offers class A shares and class B shares. At the time of this writing, A shares trade for around $750,000 compared to $500 for B shares, with each B share making up 1/1,500^th of an A share. If given the choice to invest $500 in B shares or buy 1/1,500^th of a fractional share of class A, many investors will prefer the simplicity (and satisfaction) of owning one full B share.

It's also worth noting that options contracts are typically packaged in increments of 100 shares. A lower stock price can increase interest from smaller investors who are looking to buy or sell options.

Despite these benefits, a company should only execute a stock split if it is confident it can grow its value and, in turn, its share price over time. Oracle split its stock a staggering six times between 1995 and 2000. It was too much, too fast. The dot-com bubble burst, and it took over 15 years for Oracle to exceed its all-time high from 2000. Oracle has not split its stock since then.

Netflix and Meta could split next year

Netflix and Meta have what it takes to continue compounding in value, setting the stage for stock splits in 2026.

It's been over a decade since Netflix last split its stock. The company is a completely different business today, shifting its focus from growing revenue and subscribers to cash flow and profitability. Netflix is achieving impeccable results despite much more difficult competition from legacy media companies that are expanding their streaming offerings, as well as tech companies like Apple and Amazon that offer their own services as well.

By 2030, Netflix plans to triple operating income from 2024 levels, grow operating income faster than revenue (thus expanding margins), and hit a $1 trillion in market cap. With a share price over $1,200 at the time of this writing, I could see Netflix splitting its stock by 7-for-1 in 2026, which is the same ratio as its split in 2015.

Since its initial public offering in 2012, Meta has never split its stock. It is the only member of the "Magnificent Seven" or "Ten Titans" to have never done so -- and for good reason. It's easy to forget that Meta fell below $100 per share in the fall of 2022 as investors heavily criticized management's decision to invest in the metaverse. The company recovered because it unlocked massive engagement increases through short-form videos, which made Instagram more attractive for advertisers.

Artificial intelligence (AI) was another big change for Meta, as the company has fine-tuned its algorithm to further boost engagement and provide useful metrics for advertisers. In short, Instagram has become one of the most sought-after platforms for targeted digital advertising. And Meta's share price is now over $700, a remarkable recovery in less than three years.

Like Netflix, Meta is now consistently profitable and raking in free cash flow (FCF). In the last three years, Meta has increased its FCF by 163%, and Netflix has boosted its FCF more than fivefold. What's particularly impressive about Meta's FCF growth is that it is spending a record amount on capital expenditures to boost AI infrastructure. Without that AI spending, FCF would be much higher. But investors would probably prefer the company to invest in long-term growth, given the potential reward. I could see Meta announcing a 5-for-1 split next year.

Two potential Dow Jones components

Netflix and Meta's industry leadership, profitability, and international growth potential give both companies the green light to split their stocks in 2026. Another reason these companies may split their stocks is to get added to the Dow Jones Industrial Average.

For a stock to be added to the Dow (which is a price-weighted index), its stock price can't be too high, or it would excessively shift the balance of the index. It's worth mentioning that Nvidia, Amazon, and Sherwin-Williams all underwent stock splits before being added to the Dow in 2024. Adjusted for splits, all three stocks had a share price below $400 when they were added to the Dow.

A glaring flaw in the Dow is that it doesn't have exposure to social media. With two large cloud providers already in the Dow (Amazon and Microsoft), Meta might have a better chance of replacing Verizon Communications than Alphabet.

A less likely scenario is that Netflix replaces Walt Disney in the Dow. Disney has been underperforming the broad market for years, but it has made substantial headway in monetizing its streaming business recently.

Beyond the typical benefits, stock splits would also position Meta and Netflix for consideration in the event of further Dow Jones index shakeups in 2026. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Chipotle Mexican Grill, Nvidia, and Walt Disney and has the following options: short November 2025 $120 calls on Walt Disney, short October 2025 $40 puts on Chipotle Mexican Grill, and short October 2025 $42 calls on Chipotle Mexican Grill. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Chipotle Mexican Grill, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Walmart, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom, Sherwin-Williams, and Verizon Communications and has recommended the following options: long January 2026 $395 calls on Microsoft, short December 2025 $45 calls on Chipotle Mexican Grill, and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Chipotle Mexican Grill, Meta Platforms, Microsoft, Netflix, Nvidia, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Two customers combined to provide 39% of Nvidia’s revenue in its latest quarter.
• Nvidia’s supply chain is complex, depending on numerous suppliers, equipment designers, and manufacturers.
• Broadcom’s AI sales growth is heavily dependent on a handful of hyperscaler customers.

Perhaps no company benefited more from the artificial intelligence (AI) trend than Nvidia (NASDAQ: NVDA).

In just five years, Nvidia's most important end markets shifted from gaming and professional visualization to data centers, though its core products remained the same -- graphics processing units (GPUs) and associated software and infrastructure.

Companies across a wide array of industries now depend on Nvidia's solutions to power their AI workflows. But without a couple of key customers, Nvidia's growth in recent years wouldn't have been nearly as impressive as it was.

Here's why Nvidia is increasingly relying on two customers, and if the AI growth stock is a buy now.

Peeling back the curtain

In its quarterly reports, Nvidia regularly highlights the importance of a select group of key customers. It doesn't disclose their names, however. Instead, it refers to them as Customer A and Customer B.

In its fiscal 2026 first quarter, Customer A represented 16% of total revenue and Customer B was 14%. But in its latest earnings report, delivered on Aug. 27, Nvidia said that Customer A had contributed 23% of total revenue and Customer B amounted to 16%. In just three months, those two companies went from 30% of total revenue to 39%.

Nvidia's revenue was $44.1 billion in fiscal Q1 and $46.74 billion in fiscal Q2. Customer A and Customer B accounted for $13.23 billion in Q1 revenue and $18.23 billion in Q2 revenue. But Nvidia only grew revenue by $2.64 billion quarter-over-quarter. So without Customer A and B, Nvidia's revenue would have been down by $2.36 billion quarter-over-quarter.

Customer A and Customer B aren't just Nvidia's key accounts: They are single-handedly supporting its investment thesis right now.

The chipmaker's sales to four other direct customers contributed 14%, 11%, 11%, and 10% of revenue, respectively, in the fiscal second quarter. All of these unnamed customers' revenue was attributed to Nvidia's Compute and Networking segment for data centers -- which provided 87.9% of total revenue in its latest quarter.

Understanding Nvidia's supply chain

Nvidia's dependence on Customer A and Customer B is a risk worth monitoring. It's also a bit misleading due to the structure of Nvidia's supply chain.

Nvidia's key end users are hyperscalers like Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, Meta Platforms, and Oracle Cloud Infrastructure. But these companies often buy Nvidia's chips through contractors that assemble AI server racks with Nvidia's GPUs and associated networking, storage, cooling, etc.

For example, a hyperscaler may order one of Nvidia's GB300 Blackwell Ultra rack-scale servers from Hon Hai Precision Industry, commonly known as Foxconn, rather than buying it from Nvidia directly. On Aug. 26, Nvidia reported that Foxconn was among a list of companies adopting its new RTX Pro Servers for AI reasoning, physical AI, and business workloads.

In its latest quarterly report, Nvidia listed add-in board manufacturers (companies that build graphics cards using Nvidia's chips), distributors, original device manufacturers, original equipment manufacturers, and system integrators as examples of its direct customers. By contrast, it described cloud service providers, internet companies, enterprises, and public sector utilities, among others, as indirect customers that largely purchase products through the direct customers. In other words, it's not that AWS or Microsoft is likely Customer A or Customer B. Rather, those tags are probably being put on major distributors that are likely supplying multiple cloud infrastructure providers.

Concentration has become the norm for AI chip makers

Nvidia's jargon around customer identities can make it difficult to determine just how much of its business is tied to each specific hyperscaler. However, based on the capital expenditures of top cloud companies, it's clear that Nvidia will need its key end users to profit from their AI spending to justify them boosting their order volumes.

Nvidia isn't alone in the tech world in relying on just a few customers. Broadcom (NASDAQ: AVGO) management forecast that its AI semiconductor sales will make up over 32% of revenue in its fiscal third quarter. And a large fraction of that revenue is coming from a handful of customers.

On its fiscal Q4 2024 earnings call in December, Broadcom management discussed how the company is working to expand its core customer base beyond the three hyperscalers that have been major contributors to its top line. Now, it has two additional hyperscalers that are developing their own next-generation AI XPUs. Broadcom forecasts that it will convert these prospects into revenue-generating customers by 2027. While we don't know for sure who these customers are, Meta and Alphabet are almost certainly two of the three established customers, and Apple and TikTok parent company ByteDance could be the prospects, based on other news reports that they are both building custom chips with Broadcom.

Meta Platforms is building the world's first multigigawatt "supercluster" data center next year. And it's highly likely that this data center will be jam-packed with Broadcom AI clusters, given that Broadcom is working with Meta on its custom AI chips. Google Cloud partners with Broadcom to make its custom Tensor Processing Units, which power Google DeepMind's AI chatbot, Gemini, as well as Google Search and other applications.

By following Broadcom's more direct commentary on its key hyperscale customers, we can infer that Nvidia is depending on the same cast of characters to drive its growth.

Nvidia is still a buy

Nvidia's increasing reliance on Customer A and Customer B isn't necessarily a red flag, as these are direct customers (likely suppliers) that are processing orders for multiple end-users. However, what does pose a risk to Nvidia, Broadcom, and the AI investing theme in general is the possibility of a pullback in capital expenditures by hyperscalers.

Right now, capex as a percentage of revenue is at a five-year high for Amazon, Microsoft, Alphabet, Meta Platforms, and Oracle -- meaning that these companies are in expansion phases. However, eventually, the cycle may shift as these companies redirect their focus from accelerated growth to generating free cash flow. And when that happens, it will likely affect the primary beneficiaries of that spending -- companies like Nvidia and Broadcom.

Nvidia is still a foundational AI growth stock to buy and hold, but investors who buy it should understand that these cyclical gyrations could lead to choppy stock price movements. However, volatility like this is worth enduring over the long term when a business's underlying fundamentals are sound. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Nvidia stays red hot, pushing the S&P 500 and Nasdaq toward all-time highs.

• Going forward, gaining trillions in market cap will be easier on a percentage basis.

• The chipmaker’s sustained success depends on a handful of key customers.

Nvidia (NASDAQ: NVDA) has continued to soar higher after becoming the first company to surpass $4 trillion in market capitalization on July 9. On Aug. 7, Nvidia hit a new all-time intraday high and reached $4.48 trillion in market cap -- just shy of the $4.5 trillion mark.

Nvidia's meteoric rise isn't just a stock story; it's a market story. Nvidia is so large that it can single-handedly move the Nasdaq Composite or S&P 500 with a big gain. Gaining close to $500 billion in market value is like creating a company the size of Netflix out of thin air -- which is saying something, considering Netflix is the 16th-largest S&P 500 component by market cap. As Nvidia and its megacap peers go, so do broader market gains.

Here's why I fully expect the growth stock to surpass $5 trillion in market value and why Nvidia has a clearly defined runway for future success.

The power of percentages

Three years ago, Nvidia's market value was under half a trillion. It took a medley of investor optimism, earnings growth, and the dawn of a new age in artificial intelligence (AI) to pole-vault Nvidia over $4 trillion in market cap to become the most valuable company in the world. But Nvidia's road to $5 trillion and beyond will be much easier.

Going from $0.5 trillion to $4 trillion is an eightfold gain, whereas going from $4 trillion to $5 trillion is just a 25% gain. It's an unprecedented amount of value creation, but on a percentage basis it's not asking a lot over a few years. However, if Nvidia's earnings growth rate slows, investors may be less willing to pay such a premium price for the stock.

Nvidia commands a price-to-earnings ratio of 58 -- which is far higher than most of its megacap peers. But Nvidia is growing earnings much faster, so it can back up that valuation. However, if Nvidia were to slow down to levels of a company like Microsoft -- which has achieved 15% revenue growth over the last few years with net profit margins around 36% -- then Nvidia's valuation could compress.

The stock's P/E could come down, its earnings growth rate could slow, and it could still be an excellent investment, continuing to hit market-cap milestones. But the bigger question is, where are the earnings going to come from?

Nvidia's "big four"

Arguably the simplest reason why Nvidia can continue steadily growing over time is that its customers are some of the best companies in the world.

In Nvidia's quarterly 10-Q filings, the company typically has a section titled Concentration of Revenue. In Nvidia's most recent 10-Q from May -- which was the first quarter of its fiscal 2026 -- the company said that sales to one direct customer, Customer A, represented 16% of total revenue for the quarter. Customer B was 14%, sales to another direct customer were 13%, and a fourth customer was 11%.

All four customers' revenue was attributable to Nvidia's compute and networking segment -- which is primarily high-performance graphics processing units (GPUs) for data centers and associated hardware and software to handle AI workloads, like products that connect GPUs together and help the system communicate.

Combined, these customers made up a staggering 54% of total quarterly revenue. While Nvidia doesn't directly disclose who these customers are, it's highly likely they are Amazon, Microsoft, Alphabet, and Meta Platforms -- all of which are using Nvidia chips to power their AI data centers, infrastructure, and services.

Outside of these "big four," there are plenty of companies that are rapidly expanding their cloud and AI aspirations, like Oracle through Oracle Cloud Infrastructure. Tesla is a big Nvidia customer, using its chips for its autonomous driving models. OpenAI is also a major indirect customer of Nvidia through the Microsoft Azure OpenAI service, which is a platform for using and developing OpenAI models.

Normally, revenue concentration is a red flag because it means one or two customers can tank results if they pull back on spending. But in the case of Nvidia, it's arguably a strength because its top customers have exceptional balance sheets, growing earnings, and ample free cash flow. In other words, they have the resources and innovation pathways to steadily grow their spending over time, and in turn, contribute to Nvidia's earnings growth.

Nvidia needs AI spending to pay off

Nvidia's road to $5 trillion in market cap will be easier on a percentage basis now that it is hovering around the $4.5 trillion mark. However, for Nvidia to continue being a winning stock, its top customers have to get a worthwhile return on their investments. In other words, the AI market must continue to grow, and Nvidia must lead it from a compute and networking standpoint.

Therefore, Nvidia investors may want to consider connecting the dots by following what its top customers are saying in their investor presentations and quarterly results. If they remain enthusiastic about AI and continue boosting their budgets for it, then Nvidia stands to benefit. However, Nvidia's earnings and stock price could take a big hit if the spending cycle goes from expansion to a slowdown.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post After hitting $4 trillion, it took Nvidia just 1 month to gain another $480 billion in market cap. Is $5 trillion inevitable? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Meta Platforms, Microsoft, Netflix, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Microsoft and Nvidia are crushing the S&P 500 so far this year.

• Microsoft is converting investments into earnings growth.

• The company continues to find new ways to expand its AI offerings.

On July 9, Nvidia (NASDAQ: NVDA) became the first company to reach $4 trillion in market cap. But Nvidia's stint as the lone company on the $4 trillion podium wouldn't last.

A scorching rally, followed by blowout earnings report and guidance, springboarded Microsoft (NASDAQ: MSFT) above $4 trillion on July 31 -- making these two tech giants the undisputed heavyweight champs in the age of artificial intelligence (AI).

As of market close on July 31, Microsoft was up 26.9% year to date compared to a 7.8% gain in the S&P 500. Microsoft had dropped out of the $4 trillion club by Monday morning, but I'm sure it will get back there. Here are three reasons Microsoft deserves to be in the $4 trillion club and why it could still be a growth stock worth buying now.

1. Entering a new growth gear

Expectations were high for Microsoft's final quarter of fiscal 2025.

Three months ago, the tech giant delivered fantastic results and updated its fiscal 2025 revenue guidance, calling for a 13.8% increase in full-year revenue. Not only did Microsoft surpass that target with 15% full-year revenue growth, but it also boosted margins and earnings.

Microsoft finished the fiscal year with a 45.6% operating margin and a 36.1% profit margin -- meaning it is converting $0.36 of every dollar in revenue into net income.

It's also worth mentioning that Microsoft hasn't been relying on acquisitions to fuel its higher numbers. Rather, it has been expanding its core business segments -- which tends to be a better path to earnings growth because it shows the underlying business is strong and doesn't need to pay for innovation by acquiring talent and ideas.

2. Microsoft is innovating

Growing sales at 15% is impressive on its own for a company the size of Microsoft. But doing so while also expanding margins is a testament to Microsoft's Intelligent Cloud segment, where Microsoft is experiencing high-margin growth fueled by AI.

Azure surpassed $75 billion in fiscal-year revenue as Microsoft continues building more data centers. On the earnings call on July 30, Microsoft said it continues to lead the AI infrastructure wave and now operates more data centers than any other cloud provider.

Microsoft is building larger and more efficient data centers that can handle AI workloads. It is developing tools that are advancing its AI offerings, such as Microsoft Sovereign Cloud for public and private clouds and data and analytics platform Microsoft Fabric, and also pushing forward long-term bets on quantum computing.

Outside cloud services, Microsoft Copilot continues to expand -- surpassing 100 million monthly active users. On the earnings call, Microsoft discussed how some companies initially tried out Copilot and have since expanded their orders to the enterprise level. The rapid adoption reflects the fact that Copilot is becoming an everyday tool for Microsoft 365 users.

Microsoft is unique because it is developing entirely new tools for AI-specific workflows, but it is also upgrading legacy software, like Microsoft 365, to make it more powerful. Innovating while improving core aspects of the existing business has given Microsoft impressive results, and it's why the company is growing revenue and margins quickly despite tough comps.

3. Investments are paying off

Microsoft's earnings growth hasn't come cheap. The company has been pouring resources into research and development, capital expenditures (capex), and operating expenses, and it has seen a surge in stock-based compensation. But Microsoft has been able to make these investments pay off.

Too often, companies will enter a period of expansion, get greedy, and throw resources at ideas that end up being money pits. This position can amplify losses during a downturn. For example, Intel's (NASDAQ: INTC) vertical integration created a more capital-intensive business model. Failing to keep pace with competition that was adopting new semiconductor technology to pack more transistors onto smaller chips led to Intel's falling even further behind.

Ramping up capex on its own isn't good enough. A company must invest in the right ideas and make those ideas benefit the underlying business over the long term, not just result in temporary earnings spikes.

Microsoft is putting on a clinic in capital allocation without neglecting its financial health.

For example, in fiscal 2025, Microsoft finished with $11.9 billion more in cash and cash equivalents on its balance sheet than at the end of fiscal 2024 -- and that's despite growing its expenses and dividend. However, free cash flow grew at 10% compared to 15% growth in operating cash flow as a result of higher capex.

Microsoft is guiding for $30 billion in capex in its current quarter. For context, capex in its latest quarter was $24.2 billion.

In sum, Microsoft has so far been able to convert record spending into record earnings, which is driving its record stock price. But the pace of its capex spending is entering uncharted waters, which will put more pressure on Microsoft to deliver results.

Microsoft's run-up is justified

Wall Street has been rewarding companies delivering AI-driven growth, and Microsoft has been at the forefront of that wave. Microsoft's blowout quarter and guidance suggest that it is pushing even harder on long-term investments -- but it can afford to do so, as evidenced by its rock-solid balance sheet. It continues to grow earnings faster than revenue, meaning that Microsoft isn't compromising efficiency in the pursuit of revenue growth.

Microsoft has done a masterful job allocating capital. Until that changes, Microsoft will likely remain a Wall Street darling. But if it starts showing signs of failing to convert that spending into earnings, it wouldn't surprise me to see the stock sell off.

All told, Microsoft is still worth buying and holding for investors who agree with its aggressive approach to AI and are willing to accept its higher valuation.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 reasons why Microsoft just joined Nvidia in the $4 trillion club appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Intel, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft, short August 2025 $24 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Microsoft and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Microsoft (NASDAQ: MSFT) is over $500 a share and up 19.1% year to date at the time of this writing -- handily outperforming the S&P 500's 6.8% gain.

Although Nvidia is capturing the spotlight as the first company to reach a $4 trillion market cap, Microsoft is right behind -- sporting a market cap of over $3.7 trillion.

Here's what differentiates Microsoft from other investment opportunities, what it would have to do to justify a $600 share price, and some concerns that investors will want to monitor before diving headfirst into this growth stock.

A recipe for long-term growth

Microsoft continues to be arguably the most balanced tech company on the market due to its diversified business model.

It's an industry leader in enterprise software through Microsoft 365, its business applications, the Windows operating system, developer tools like GitHub, gaming software, and more. It is also a cloud computing giant through the Microsoft Azure platform and its associated products and services. It also makes tech hardware like Surface devices, Xbox gaming consoles and accessories, and more.

Microsoft is integrating artificial intelligence (AI) across its business segments for both consumers (through Copilot AI assistants) and for enterprises (through tools like Azure OpenAI and Azure AI services).

Microsoft offers investors exposure to many different end markets under the umbrella of one company with an exceptional balance sheet, high margins, and stable cash flows.

A winner in an industry riddled with uncertainty

Possibly the simplest reason why Microsoft is doing so well and hovering around an all-time high is that its thriving in both the cloud infrastructure and application software niches in the age of AI.

This has been no easy task, as both cloud leader Amazon and third-place player Alphabet continue to aggressively invest in their cloud computing businesses -- challenging second-place Microsoft's efforts to hold and gain market share. Smaller players like Oracle and International Business Machines are also successfully building out their cloud offerings.

Investors were initially excited about the potential for enterprise software to capitalize on AI through new tools and agents that would save users time by helping them create and accomplish tasks. However, many software stocks have pulled back considerably as that optimism has moderated.

Salesforce, for example, is down 21% year to date after hitting an all-time high in December. Adobe is down more than 16% this year and a staggering 46% from its peak.

There are a lot of question marks as to which companies will thrive in the age of agentic AI -- tools that can do a variety of tasks independently once asked, rather than simply responding to prompts. Many software-as-a-service (SaaS) companies rely on selling subscriptions and seat licenses to users and organizations. But if AI agents can take on some of those tasks, that could directly impact the profitability of a company like Salesforce or Adobe. For the first time in years, the moats of some of these large enterprise software companies look penetrable. That could be especially significant if an agent can do the work that would have required an employee or individual to have several different SaaS subscriptions.

Microsoft isn't immune to the threat of agentic AI, but it is in an advantageous position relative to other software companies because of the everyday use and simplicity of many of the Microsoft 365 apps and the crossover between the Windows operating system and AI tools like Copilot across applications. Similarly, Azure AI is integrated into the Azure ecosystem. For GitHub, Microsoft has introduced "agentic DevOps," which allows AI agents to collaborate with users to develop software faster.

In sum, Microsoft's business model and existing solutions are evolving, not remaining stagnant. Its ability to adapt, paired with the strength of its other segments, is why Microsoft is doing well while many other enterprise software companies are under pressure.

Microsoft commands a premium valuation

Microsoft shareholders shouldn't get complacent just because the stock has been red-hot. The company will need to demonstrate that users are consistently willing to pay for its AI tools and that it can sustain its high margins and decent growth rates.

Lately, Microsoft's stock price growth has been outpacing its earnings growth as investors are willing to pay a higher price for the stock today because they are optimistic about its growth potential. As a result, Microsoft's valuation metrics are relatively high compared to their historical averages. In fact, its forward price-to-earnings (P/E) ratio is nearly identical to its 10-year median P/E. Meaning investors are essentially willing to pay a year's worth of premium for Microsoft stock today -- trusting that the company can grow into its valuation over time.

MSFT PE Ratio data by YCharts.

Also note Microsoft's elevated price to free cash flow (FCF).

Microsoft is a cash cow, but it is spending so much on research and development that its capital expenditures are spiking -- cutting into FCF. That strategy could pay off if Microsoft's AI investments accelerate its earnings growth. But for now, the stock is definitely on the expensive side, which is something investors should be aware of before buying.

The best way to approach Microsoft stock

In the stock market, anything can happen in the short term. So Microsoft could get to $600 a share on euphoria alone.

But for Microsoft to reach $600 a share, stay above that level, and continue growing, the company must convert its capex into earnings growth. Or more specifically, it must hold or grow its market share in cloud infrastructure, continue developing useful AI tools, and spearhead agentic AI. Otherwise, investors may start to question whether its high capex is worthwhile or borderline wasteful.

It's also worth mentioning that Microsoft isn't just throwing all of its dry powder on AI and hoping for a boom. The company has allocated a considerable amount of capital toward stock buybacks and dividends while maintaining a balance sheet with far more cash, cash equivalents, and short-term investments than long-term debt. In other words, Microsoft isn't betting the farm on its AI investments -- but it is executing a more aggressive capital allocation strategy than it has in years past.

Overall, Microsoft remains a solid, foundational growth stock that investors can build a portfolio around. It would be easy to look at the run-up Microsoft has in its rear-view mirror and say the stock is overvalued. Or to say that the stock won't be worth buying until the company can bridge the gap between expectations and results. But selling shares of an excellent business just because its valuation is on the pricey side is usually a bad idea.

Rather, a better approach is to let your winners run and allow them to grow into their valuations over time. I think that's a good approach to investing in Microsoft right now. The stock isn't cheap, but it arguably doesn't deserve to be, given that the company is firing on all cylinders. So, while Microsoft has certainly run up far and fast, its shares could still be worth buying for patient long-term investors.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Microsoft: Next stop $600 or has the growth stock run up too far, too fast? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Adobe and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Adobe, Alphabet, Amazon, International Business Machines, Microsoft, Nvidia, Oracle, and Salesforce. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Adobe, Alphabet, Amazon, Microsoft, Nvidia, and Salesforce. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

On Dec. 26, 2024, Apple crossed $3.9 trillion in market capitalization, putting it just 2% away from becoming the world's first $4 trillion company. But it didn't get there. Apple has recovered in recent weeks but remains down big year to date, whereas Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT) just made new all-time highs.

Here's why Nvidia will likely become the first company to surpass $4 trillion in market value, what Nvidia and Microsoft must do to continue rising in price, and whether either growth stock is a buy now.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

A new frontrunner

In less than three years, Nvidia has gone from billions to trillions in market cap. And now, it is the closest company to $4 trillion -- a little over 3% away as of market close on July 3.

NVDA Market Cap data by YCharts.

Nvidia will likely reach $4 trillion before Microsoft simply because it is closer to the threshold, and its stock is more volatile. Nvidia is now up over 18% year to date (YTD), but it was down around 30% YTD in early April during the worst of the tariff-induced sell-off. So it's not unreasonable that the stock could move a few percentage points higher to pole-vault its market cap above $4 trillion.

The better question isn't whether Nvidia or Microsoft will hit $4 trillion in market cap but rather what each company must do to justify that valuation.

An earnings-driven rally

The two biggest drivers of stock-price appreciation are earnings growth and investor sentiment. If earnings are increasing, investors will likely pay a higher price for the company's shares. But if investors expect the pace of earnings growth to accelerate, then they may be willing to give a stock a premium valuation.

Nvidia and Microsoft have been such strong performers in recent years because they are growing earnings and investors are willing to pay a premium price for these companies relative to their earnings. Nvidia went from making under $10 billion in annual net income to a staggering $76.8 billion in just a few years. Microsoft has doubled its net income over the past five years, and its stock price has more than doubled as well.

NVDA data by YCharts.

For Nvidia and Microsoft to continue being good investments going forward, both companies must demonstrate that their earnings growth is sustainable and not temporary.

Nvidia's valuation is still reasonable

Nvidia has greatly benefited from the rapid rise of big tech spending on artificial intelligence (AI). Nvidia has a dominant market share in providing high-powered graphics processing units (GPUs) for data centers and associated AI solutions for enterprises.

Due to limited supply and high demand, Nvidia can charge top dollar for its AI offerings, which allows it to convert over half of its sales into pure profit. And because Nvidia's customers are some of the most financially secure, big-budget companies in the world (like Microsoft), then Nvidia knows its customers can afford to spend a ton on AI.

However, that wouldn't be the case if challenges arise for key Nvidia customers if there is an industrywide slowdown or if competition comes along and erodes Nvidia's margins. Buying Nvidia now is a bet that the company can continue growing its earnings even if its margins gradually decline over time.

The good news is that Nvidia doesn't have to double its earnings every year to be a great buy. Even if it grows earnings at, let's say, 25% per year, it could still reduce its valuation over time and be a market-beating stock. Here's a look at how Nvidia's price-to-earnings (P/E) ratio would go from over 50 to under 35 in five years if it grew earnings at 25% per year, and the stock price gained an average of 15% per year.

Under these assumptions, Nvidia's stock price roughly doubles in five years, but its earnings triple, so the P/E ratio falls considerably.

The key takeaway is that Nvidia doesn't have to sustain its parabolic growth to be a good investment. However, the stock could sell off dramatically if investors believe an unforeseen risk will interrupt its growth trajectory. We got a taste of that in April when Nvidia estimated it would incur multibillion-dollar charges due to tariffs, and the stock price nose-dived in a short period.

In sum, investors should only consider Nvidia if they are confident in sustained AI spending and the company's ability to pivot as the market matures.

Far from a one-trick pony

Microsoft may be a better choice for investors seeking a more balanced tech stock to purchase. Microsoft has a lower P/E than Nvidia, and for good reason, because it isn't growing as quickly. However, Microsoft also doesn't need a lot to go right for it to continue growing steadily over time.

The vast majority of Nvidia's earnings are directly tied to AI. Microsoft has a diverse earnings profile, encompassing cloud computing, software, hardware, platforms such as GitHub, LinkedIn, and Xbox, as well as other areas. AI is accelerating Microsoft's earnings growth and expanding its earnings, but the company can still do extremely well even if AI investment slows and the industry matures.

It's also worth mentioning that Microsoft routinely buys back its stock and has raised its dividend for 15 consecutive years. So it has a more balanced capital-return program than Nvidia, which rewards shareholders by growing the core business rather than directly returning capital.

Two solid buys for long-term investors

Nvidia and Microsoft are exceptional companies. It wouldn't be surprising to see them both surpass $4 trillion market caps and continue building from there. However, investors should be mindful that both companies are seeing their stock prices rise faster than their earnings are growing, which puts pressure on them to bridge the gap between expectations and reality.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Nvidia vs. Microsoft stock: Which will be the first $4 trillion company? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The stock market cares more about future earnings potential than the past -- and that may be why Nvidia, Microsoft, Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN) are all worth more than Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) today even though Alphabet is the only S&P 500 stock with over $100 billion in trailing-12-month net income.

Here's why the market views Alphabet's earnings differently than other megacap growth stocks, and whether Alphabet is a buy now.

More than just a number

Earnings are one of the most important metrics investors use to value a company. How much profit a company generates is an integral part of an investment thesis. But so are expectations for future profits.

GOOGL Net Income (TTM) data by YCharts

Although net income is just a number, there are nuances worth understanding. A leading company that operates in a growing industry with competitive advantages, high profit margins, and a great balance sheet will have far higher-quality earnings than a company operating in a declining or even failing industry that is cyclical and capital-intensive.

This concept is why even the best oil and gas companies, like ExxonMobil and Chevron, sport such inexpensive valuations. Their earnings aren't high-margin. Generating them takes a lot of capital. And oil and gas consumption may look much different decades from now than today. This doesn't mean ExxonMobil and Chevron are bad companies. In fact, both are excellent dividend stocks. It just means investors are unlikely to pay the same price for these companies relative to their earnings as, say, an ultra-fast-growing company with high margins like Nvidia.

Alphabet doesn't have a capital-intensive business model. It generates high margins and has diverse revenue streams from its services like Google Search, Google Network, YouTube, Android, Google Cloud, and more. It also has a phenomenal balance sheet with more cash, cash equivalents, and marketable securities than debt. Despite these advantages, Alphabet sports a price-to-earnings (P/E) ratio and forward P/E ratio that are far lower than Nvidia, Microsoft, Apple, and Amazon.

NVDA PE Ratio data by YCharts

Expectations drive valuations

This discounted valuation is why Alphabet is worth less than its peers despite making more profit. Alphabet's valuation is much cheaper than some of its peers because investors are less optimistic about its future earnings prospects.

Nvidia is powering the future of artificial intelligence (AI) with its graphics processing units for data centers. Big tech continues to spend on AI, so investors are optimistic that demand for Nvidia's products will continue growing.

Microsoft is integrating AI into its software and is the No. 2 player in cloud computing behind Amazon. In contrast, Alphabet's Google Cloud is a distant third in market share.

Apple isn't growing quickly, but the company has such a dominant, vertically integrated ecosystem of consumer products and services that investors are willing to pay a premium price for the stock relative to its earnings.

Alphabet makes the majority of its operating income from Google Search. Unlike Amazon (and arguably Microsoft), cloud is not the most valuable aspect of the company. Alphabet's AI plays mainly come from Google Cloud and its "Other Bets" category, which consists of projects like self-driving company Waymo and AI research lab DeepMind, which is behind the chatbot Gemini.

In sum, the market may be viewing Alphabet's business model as more vulnerable to technological advancements in AI than other megacap growth companies that are clearly benefiting from AI.

Alphabet is an impeccable value

There's a famous (and still relevant) quote by Warren Buffett that goes, "You pay a very high price in the stock market for a cheery consensus." Companies that are favorable to many investors tend to demand expensive valuations, whereas companies with an element of uncertainty can fetch a discount.

The simplest reason to buy Alphabet right now is if you believe the market's skepticism about the company's AI potential is unwarranted or overblown. In that case, investors can buy Alphabet at a steep discount to its peers. If Alphabet had a 30 P/E ratio instead of a sub-20 P/E, it would be worth well over $3 trillion. If it had Microsoft's P/E, it would be the most valuable company in the world.

In many ways, Alphabet deserves to trade at a discount to these other big tech names. But maybe only by a little bit -- not the drastic discrepancy we are seeing in the market today. All told, now is a great time for value investors interested in big tech to buy Alphabet stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why is Alphabet stock worth less than Nvidia, Microsoft, Apple, and Amazon even though it is the most profitable S&P 500 company? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Chevron, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

On May 3, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) reported its first-quarter 2025 results and hosted its annual shareholder meeting in Omaha.

One of the standouts from the earnings release was Berkshire's position in cash, cash equivalents, and short-term Treasury bills, which increased by 84% over the past year from $188.99 billion as of March 31, 2024, to a whopping $347.68 billion as of March 31, 2025.

Yet even with all that cash, Berkshire elected not to repurchase its own stock. It marked the third consecutive quarter Berkshire didn't buy back its stock -- which is out of the ordinary considering Berkshire had been on a 24-quarter streak of buybacks prior to the recent dry spell.

Here's what the treasure trove of cash and lack of buybacks signal, and if Berkshire is still an excellent value stock to buy now.

Building up cash

Buffett has a track record for making occasional blockbuster moves and then doing very little for multiple years. The strategy involves deploying significant capital toward top ideas rather than acting on impulse.

Most of Berkshire's largest stock holdings were acquired fairly quickly and then held over time. Similarly, the success of controlled assets like Berkshire's insurance businesses is a testament to developing these businesses over the long term, not constant wheeling and dealing.

If there were ever a time for Berkshire to build up its cash position, it would be now.

The S&P 500 is coming off back-to-back years of over 20% gains in 2023 and 2024 -- which Berkshire benefited from through its holdings in public securities and the growth of its controlled assets.

Furthermore, interest rates are relatively high, which provides an added incentive to hold risk-free assets like Treasury bills.

Data by YCharts.

Given these factors, it makes sense why Berkshire would build up its cash position, but that still doesn't explain why it wouldn't repurchase stock.

Berkshire's valuation is more expensive

The price-to-book ratio, also known as book value, is a better financial metric for valuing Berkshire than price-to-earnings or price-to-free cash flow because Berkshire operates as a conglomerate where net income can swing wildly from year to year based on changes to operating earnings and the value of its businesses.

Buffett has long used buybacks as a way to return capital to shareholders. Berkshire famously doesn't pay a dividend because Buffett feels that buybacks are a better use of capital than the one-time benefits of dividends, and he's been absolutely correct, given the long-term appreciation of Berkshire's stock price.

In Berkshire's quarterly earnings reports, there's a note that "Berkshire's common stock repurchase program permits Berkshire to repurchase its shares any time that Warren Buffett, Berkshire's Chairman of the Board and Chief Executive Officer, believes that the repurchase price is below Berkshire's intrinsic value, conservatively determined." And that "repurchases will not be made if they would reduce the value of Berkshire's consolidated cash, cash equivalents and U.S. Treasury bill holdings below $30 billion."

Since Berkshire's cash equivalents and U.S. Treasury bill holdings are over 11 times the $30 billion threshold, the holdup must be due to Berkshire's intrinsic value being above what Buffett would like.

Historically, Buffett has given the green light for buybacks when Berkshire's book value falls below 1.1, which was later upped to 1.2 times book value. But the guidelines have been flexible in recent years because Berkshire was buying back stock before the recent pause at higher price-to-book levels.

Berkshire's book value has soared because its market cap has grown at a faster rate than the value of its assets. Or, put another way, the stock price has been going up not because of massive gains in public equities Berkshire holds, but because investors are putting a premium price on its controlled assets and cash position.

Data by YCharts.

Berkshire is viewed as a safe stock amid tariff turmoil and market uncertainty because of its operational excellence and industry-leading performance across key economic sectors. Many of Berkshire's controlled assets, like the insurance businesses, are U.S.-focused, insulating them from geopolitical and trade tensions.

It's also worth mentioning that, during the annual meeting, Buffett discussed the 1% excise tax imposed on stock buybacks by publicly traded companies as another reason why buybacks aren't as attractive right now.

Buying Berkshire for the right reasons

The simplest reason to own Berkshire Hathaway stock over the long term is a belief in its capital allocation strategy and risk management. Berkshire stock isn't as cheap as it used to be, but just because Berkshire isn't buying back its stock doesn't mean individual investors should run for the exits. Berkshire is simply doing what it feels is best to maximize operating earnings and protect savings that investors have entrusted it to manage.

All told, Berkshire isn't a screaming buy, but it's a perfectly fine stock to buy and hold for long-term investors looking for a company they can count on no matter what the economy is doing.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Meta Platforms (NASDAQ: META) rocketed 4.2% higher on Thursday in response to strong first-quarter earnings. The stock has erased almost all of its year-to-date losses in recent weeks, and, at the time of this writing, it is just a couple of percentage points off from being even on the year.

Here's why the company's latest results -- and management commentary on the earnings call -- reinforce its underlying investment thesis, and why Meta is a top growth stock to buy now.

Family of apps continues to drive high-margin growth

Meta delivered 16% higher revenue -- but operating income soared 27%, thanks to just a 9% increase in costs and expenses. Meta finished the quarter with a sky-high operating margin of 41% -- meaning it converted 41 cents of every dollar in revenue into operating income.

Manageable spending also led to a 35% increase in net income and a 37% jump in diluted earnings per share (EPS).

This profitability is a testament to the company's strong business model. It's driving user engagement, which attracts advertisers. Meta's engagement metric -- family daily active people (DAP) -- refers to daily active people across its "family of apps" segment, which includes Instagram, WhatsApp, Facebook, Messenger, and Threads. DAP rose 6% year over year, which supported a 5% increase in ad impressions and a 10% increase in price per ad.

The following chart shows how diluted EPS has more than tripled from pre-pandemic levels, thanks to consistent revenue growth and margin expansion:

META Revenue (TTM) data by YCharts.

Results were excellent, but the company's outlook and confidence in its long-term investments were arguably even more encouraging.

Accelerating AI spending

Meta is guiding for $42.5 billion to $45.5 billion in Q2 2025 revenue. At the midpoint of $44 billion, that would be a 12.6% jump from Q2 2024 -- which was a difficult comparable, considering Q2 2024 revenue was up 22% year over year.

The company is lowering its full-year guidance for total expenses from a range of $114 billion to $119 billion to a new range of $113 billion to $118 billion. But it's raising its full-year 2025 capital expenditures (capex) expectations to between $64 billion and $72 billion -- up from its prior outlook of $60 billion to $65 billion.

Most of capex is going toward generative artificial intelligence (AI) and core business needs. Meta is investing in infrastructure improvements (like building data centers) to scale up its AI services, while maintaining control and flexibility of its operations so it can react to changing customer preferences. Management said that it's generating strong returns from its AI initiatives by increasing the efficiency of its workloads. For example, AI-driven feed and video recommendations delivered a 7% increase in time spent on Facebook and a 6% increase in time spent on Instagram.

AI is favorably impacting user engagement and helping advertisers customize campaigns based on their objectives and budgets. On April 29, the day before Meta reported earnings, it released the Meta AI app, which leverages the latest version of its large language model -- Llama 4. The Meta AI app is a stand-alone tool, which is different from embedded AI functionality in Instagram, Facebook, and WhatsApp. The app can solve problems, answer questions, provide deep dives on topics, and more -- which makes it a competitor to ChatGPT and Alphabet-owned Google Search.

Meta's sustained growth and higher capex, despite difficult comps and an uncertain macro environment, speak volumes about its business model's effectiveness and its belief in long-term investments in AI and other research and development.

The company continues to pour money into its Reality Labs division, which is building devices and experiences in virtual reality, augmented reality, the metaverse, and other efforts. And while the core family of apps segment continues to deliver high-margin growth, Reality Labs is a money pit -- posting an operating loss of $4.2 billion in the quarter. In 2024, Reality Labs lost a staggering $17.73 billion. As high as that figure is, Meta can afford it because of the impeccable performance of its family of apps.

Reality Labs has shown some bright spots. For example, Ray-Ban Meta AI glasses had four times as many monthly active users as a year ago. Despite the upside potential, Reality Labs is simply too unproven to factor into Meta's investment thesis.

Returning capital to shareholders

Even with its aggressive capex spending and ongoing support of the unprofitable Reality Labs division, Meta can still afford to return a significant amount of capital to shareholders. In its latest quarter, it spent $13.4 billion on buybacks and $1.33 billion on dividends. (Meta began paying dividends last year.)

If it were to sustain the same pace of buybacks and dividends for the whole year, it would return roughly 4% of its market cap to shareholders. Put another way, if Meta only paid dividends and didn't repurchase stock, it would have a dividend yield of 4% -- illustrating just how massive its capital return program is.

Over time, buybacks have helped the company grow earnings far faster than net income. Despite its high stock-based compensation, Meta has achieved one of the most aggressive share-count reductions of the megacap tech-focused companies. In just five years, Meta has reduced its share count by 11.4%, which is slightly more than Alphabet's 10.9% reduction and a bit shy of Apple's 12.8%.

Steady buybacks and earnings growth have helped keep the stock's valuation reasonable despite its strong share price. Meta's stock price has soared 152% in the last five years, but diluted EPS has grown even faster, so the price-to-earnings (P/E) ratio has actually fallen. In fact, Meta sports a P/E of just 22.4 -- which is dirt cheap for an industry-leading company with high margins.

What's even more impressive is that earnings would be even higher if the company weren't losing billions each quarter on Reality Labs. So from that perspective, Meta is beyond cheap.

Meta Platforms is a high-conviction buy

Meta checks all the boxes of a top growth stock to buy now.

The core business continues to fire on all cylinders and generate plenty of cash flow to use for higher capex. Meta has done a good job managing operating expenses to support its long-term investments and help cushion the blow from Reality Labs losses.

The company continues to repurchase stock at a breakneck pace, keeping a tight lid on its valuation. Its ultrastrong balance sheet allows it to navigate an economic slowdown or pounce on acquisition opportunities.

Add all that up, and Meta Platforms is one of the best buys today: It can play a foundational role in a diversified portfolio for growth and value investors alike.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company, Motley Fool Holdings Inc., has positions in and has recommended Alphabet, Apple, and Meta Platforms. The Motley Fool Australia has recommended Alphabet, Apple, and Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported excellent first-quarter 2025 earnings. It also raised its dividend by 5%, marking the first raise since Alphabet initiated its dividend last year.

And yet, Alphabet is still down big year to date -- underperforming the Nasdaq Composite (NASDAQINDEX: ^IXIC) and many of its megacap growth stock peers.

Here's why Alphabet's latest results reinforce its underlying investment thesis and why Alphabet is a top growth stock to buy now.

Alphabet's blowout quarter

There was a lot to like from Alphabet's latest print.

Revenue jumped 12% while operating income grew by 20% and diluted earnings per share (EPS) skyrocketed 49%.

High-margin segments like Google Search and YouTube have led to steadily rising revenue and a 10-year-high operating margin.

GOOGL Revenue (TTM) data by YCharts

Alphabet breaks up its business into two segments: services and Google Cloud.

Services include Google Search, YouTube, Google Network, and subscriptions, platforms, and devices.

Services brought in $77.26 billion in revenue in the recent quarter, $50.7 billion of which was Google Search. The segment's operating income was a whopping $32.68 billion -- good for a 42.3% operating margin.

Meanwhile, Google Cloud brought in $12.26 billion in revenue -- a 28% year-over-year increase. But it only booked $2.18 billion in operating income for an operating margin of 17.8%. Granted, margins could be a lot higher if Alphabet weren't in expansion mode. But margins are low because Alphabet is pouring resources to try to take market share from rivals like Amazon Web Services and Microsoft Azure.

Risks worth considering

Alphabet's results were excellent, so investors may be wondering why the stock price remains beaten down. Arguably, the two primary reasons are Alphabet's increased spending and uncertainty regarding the sustainability of Google Search.

Alphabet's capital expenditures (capex) in the recent quarter were $17.2 billion -- a staggering 43% increase compared to the first quarter of 2024. For the time being, Alphabet can absorb higher capex since it is growing revenue and operating margins at such a strong pace. But it needs to keep up the pace to justify higher spending.

The elephant in the room is Google Search. As mentioned, Google Search ad revenue topped $50 billion in the recent quarter, or 56.2% of total revenue. But Google Search is under pressure from rival information resources like ChatGPT or even TikTok and Meta Platforms' Instagram, which younger generations are increasingly using to search for information and content. Last week, Meta Platforms released a stand-alone AI app powered by Llama 4 -- its latest large language model.

In sum, it's unclear if Alphabet's high capex will pay off or if Google Search will stay as dominant as it has been for decades. Or put another way, it seems Alphabet is on the defensive, whereas peers like Meta have a clearer trajectory toward sustainable growth.

Returning tons of capital to shareholders

Alphabet's increasing competition shouldn't overshadow its impeccable capital return program. In the recent quarter, Alphabet spent $17.5 billion on its capital return program -- consisting of $15.07 billion in buybacks and $2.43 billion in dividends. It's nice that Alphabet is now paying a dividend, but buybacks are still magnitudes larger.

The run rate of the capital return program for a full year is about $70 billion, or 3.5% of Alphabet's roughly $2 trillion market cap. Meaning that if Alphabet only paid dividends and didn't repurchase stock, it would yield 3.5%.

Buybacks have a major impact over time because they reduce the outstanding share count -- thereby increasing EPS. Dividends, by contrast, are a one-time benefit, and shareholders must pay taxes on dividends in non-retirement accounts.

Over the last five years, Alphabet has reduced its share count by a staggering 10.9%. That's nearly as much as Apple's 12.3% reduction -- and Apple is known for its aggressive buybacks. Buybacks have allowed Alphabet's EPS to grow much faster than net income -- giving Alphabet a dirt cheap valuation.

Too cheap to ignore

Out of the "Magnificent Seven" companies -- Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla -- Alphabet has the lowest price-to-earnings (P/E) ratio at just 17.7 and price-to-free-cash-flow ratio at 26.2.

Alphabet's cheap valuation reflects investor skepticism on its ability to monetize artificial intelligence relative to other megacap growth companies. But that doubt is arguably baked into Alphabet's valuation.

A 17.7 P/E ratio isn't just low -- it's a bargain-bin level for a high-margin company that continues to grow at an impressive rate. For context, safe and stodgy dividend-paying Procter & Gamble has a P/E ratio over 25. That's no knock on P&G, as it deserves a premium valuation. But P&G doesn't have Alphabet's growth prospects or margins.

A balanced buy at a compelling valuation

Alphabet is typically viewed as a growth stock, but its earnings multiple puts it in value stock territory. The dividend yield of 0.5% is misleading, considering Alphabet spends the bulk of its capital return program on buybacks.

Alphabet is priced as if it is doomed to margin compression and lost market share -- when its results indicate the opposite. Investors are getting a phenomenal opportunity to scoop up shares of Alphabet while they are stuck in the bargain bin.

However, if you do buy Alphabet, it is worth keeping a tight watch over its capex, its ability to take market share from other cloud competitors, and the resiliency of Google Search in the face of mounting competition.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Microsoft (NASDAQ: MSFT) stock has gone nowhere over the last year and is currently hovering around a six-month low. The company has done an excellent job monetising artificial intelligence (AI), but the reported efficiency improvements in AI models like DeepSeek have cast a spotlight on AI spending and sparked worry.

Out of the 30 components in the Dow Jones Industrial Average (DJX: .DJI), Microsoft stands out as a unique balance of growth potential, value, and a little passive income as the cherry on top of a strong underlying investment thesis. Many other Dow components have strong earnings growth or are a good value, but not both.

Here's why Microsoft is my top Dow Jones stock to buy now.

Running up too fast

Let's take a trip back to 2023: Microsoft is coming off a big down year, with the stock falling 28.7% in 2022 in lockstep with a brutal downturn across big tech.

Management hosted its second-quarter fiscal 2023 earnings call on Jan. 24, 2023. During the call, the company shared exciting news about AI and a partnership with OpenAI, including support for ChatGPT and news that Microsoft will be OpenAI's exclusive cloud provider -- led by Azure AI services.

As 2023 carries on, AI excitement takes off, with Nvidia (NASDAQ: NVDA) reporting exponential growth in sales of graphics processing units (GPUs) for data centers. Microsoft stock finished 2023 56.8% higher, closing out the year at $376.04 per share. Since then, the stock is up just 8.6%.

This is a good example of a company's stock price getting ahead of fundamentals. AI has been a game changer for Microsoft, leading to faster top-line growth and higher margins. But it hasn't led to paradigm-shifting growth in the same way as it has for other big tech stocks like Nvidia and Meta Platforms. Rather, Microsoft uses AI to improve existing products and develop new tools and services.

Microsoft is making strides across its business segments

Microsoft 365 Copilot is an AI tool for the company's flagship software suite. In its second-quarter fiscal 2025 earnings call, management called 365 Copilot "the UI for AI" -- meaning it is handling everyday employee productivity. (UI stands for user interface.) It continues to see accelerated adoption for 365 Copilot.

GitHub Copilot is helping improve developer efficiency. GitHub now has 150 million developers, a 50% increase in just two years.

In second-quarter fiscal 2025, Azure and other cloud services grew 31% year over year, including a 157% increase in AI services.

Beyond Microsoft 365, GitHub, and Azure, Microsoft has other software products like Teams, Bing, and LinkedIn. It also has a massive gaming segment with Xbox and Activision Blizzard and it sells consumer products like Microsoft Surface and computer accessories, among other things. Despite so many end markets and traditionally lower-margin hardware offerings, the company has grown revenue and margins at an impressive rate.

The following chart shows how Microsoft's accelerated sales growth in recent years has also come with higher margins, a testament to the profitability of AI investments.

MSFT revenue (TTM), data by YCharts; TTM = trailing 12 months.

However, there are concerns that Microsoft's AI spending may be overextended.

Cranking it up a notch

This fiscal year, management plans to spend $80 billion on AI and cloud-based applications. The massive investment could impact near-term profitability.

Analysts' consensus estimate calls for $13.16 in fiscal 2025 earnings per share (EPS) and $15.07 in fiscal 2026 EPS. For context, Microsoft reported $11.80 in diluted EPS in fiscal 2024, a 20% increase compared to fiscal 2023, whereas the fiscal 2025 target implies just 11.2% growth. So at least in the near term, earnings growth is decelerating. And margins could also decrease if AI spending doesn't immediately translate to measurable results.

Anytime a company bets big on an idea, it puts pressure on those investments to pay off. But there's also the risk of being too idle and falling behind in the AI race.

Therefore, the two biggest questions investors should ask are whether the company can afford to spend this much on AI without hurting its financial health, and if the investment dollars are going toward worthwhile endeavors.

In terms of financial health, Microsoft is as good as it gets. The company ended calendar year 2024 with $71.56 billion in cash, cash equivalents, and short-term investments and just $39.72 billion in long-term debt. In fiscal 2024, which ended June 30, 2024, it repurchased $17.25 billion in stock and paid $21.77 billion in dividends. While the dividend payment was higher, the buybacks were around $5 billion less than in fiscal 2023.

Management could continue pulling back on stock repurchases to fund its AI investments without taking on more debt. However, buybacks have helped offset Microsoft's stock-based compensation expense and reduce its share count over time, accelerating EPS growth. Fewer buybacks would put pressure on the core business to drive earnings growth.

In sum, Microsoft can afford to spend more on AI.

As for the second million-dollar question, there's reason to believe the AI investments are worth it. Microsoft is currently the No. 2 cloud player, ahead of Alphabet's Google Cloud but behind Amazon Web Services.

As demand for cloud computing grows to support AI workflows, Microsoft wants to ensure it is well positioned to take market share by providing advanced data centers and the best AI services. If it doesn't take market share, its investments could still pay off as long as the overall cloud computing pie grows.

A balanced stock to buy now

As a legacy tech company, Microsoft hasn't been transformed by AI in the same way as smaller, faster-growing companies like Palantir Technologies or more pure-play AI names like Nvidia have. But it has been a net positive for the company. And Microsoft has the financial health and deep pockets necessary to pour money into building out AI infrastructure.

The languishing stock price and steady earnings growth have pushed Microsoft's price-to-earnings ratio (P/E) to its lowest level in a year. In fact, its P/E is currently 33, which is right around its average over the last three to 10 years. But it is arguably a much higher quality business with better growth prospects today than in years past, making its valuation even more compelling.

As mentioned, management spends a ton on dividends every year. The company has increased its payout every year for nearly two decades, and although the stock yields just 0.8%, Microsoft's growing dividend provides an added incentive to buy and hold the stock.

With a diversified business model, an affordable AI budget, and a reasonable valuation, Microsoft checks all the boxes for a foundational growth stock to buy now and build a portfolio around.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post At a 6-month low, here's my top Dow Jones stock to buy now appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Daniel Foelber has no position in any of the stocks mentioned. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.