When it comes to investing in equities, buying stocks that are benefiting a great deal from current trends and those poised for a significant lift from future trends is a very good approach to take. After all, as we saw from the performances of Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA) during last year’s artificial intelligence (AI) boom, company stocks that exploited trends could rally tremendously. Another important factor when it comes to choosing the best stocks to buy is valuation. Specifically, stocks with very high valuations relative to their growth can often plunge a great deal if their issuing companies miss the Street’s expectations by even small amounts. Given these points, when choosing the three best Magnificent 7 stocks to buy, I selected those benefiting from strong current trends and without very high valuations.
Microsoft (MSFT)
Microsoft is getting a huge boost from the AI boom. That’s because MSFT is the largest investor in the popular AI-powered chatbot, ChatGPT, while the software giant is infusing AI into its operating system. Moreover, as the owner of the second-largest cloud infrastructure provider, Azure, MSFT will be able to sell many AI-powered services to its current customers.
Bank of America (NYSE:BAC) recently named MSFT one of its top three software picks. Citing “the newest AI wave, improving IT spending and the continued shift to the Cloud,” the bank is generally bullish on the software sector. What’s more, Bank of America expects the strong demand for AI to accelerate the growth of Azure and MSFT Office offerings.
Also upbeat on MSFT stock recently was Dan Ives, the well-known analyst at investment bank Wedbush. Ives named MSFT as one of his top nine picks in the tech sector.
MSFT stock has a reasonably attractive forward price-earnings ratio of 33.
Amazon (AMZN)
Amazon’s (NASDAQ:AMZN) AWS is the largest cloud infrastructure provider. As a result, AWS should get a huge boost from selling AI services. As I noted in a Dec. 6 column, the tech giant “unveiled many new, AI-oriented services it’s going to sell,” including an “AI assistant…and a new AI chip.”
I believe the growth of Amazon’s e-commerce business will also accelerate as AI makes the experience even better and Amazon takes steps to deliver products even faster.
To a lesser extent, the company should benefit from an acceleration of ad spending this year as “Ad spending growth is widely forecast to accelerate in 2024,” Forbes reported last month. Spending on “retail media” ads, a sector in which AMZN is a “dominant” player, is expected to jump almost 23% this year, the website reported. Amazon is expected to generate over $3 billion of ad revenue just from its decision to start placing ads on its Prime Video content.
Meanwhile, I remain convinced that, over the longer term, pharmaceuticals will prove to be a needle mover for AMZN stock.
Amazon’s forward price-earnings ratio of 37 is elevated but more than justified by the company’s many powerful growth catalysts. As a result, I view AMZN as the best name among the Magnificent 7 stocks.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has a relatively small but rapidly growing cloud-infrastructure business, Google Cloud, that should get a big boost from selling AI services.
Moreover, AI should significantly improve the company’s core search business and will likely spur an acceleration in the growth of its search revenue. Indeed, according to Forbes, “Deploying generative AI search experiences opens the door for different ad formats and placements, as well as an increase in surfaced links and content. AI can also drive help revenues higher from bid optimization.”
Also noteworthy is that GOOG released its own AI-powered chatbot called Bard, which should greatly enhance its search services and generate a significant amount of revenue for the company.
Finally, the revenue of GOOG’s YouTube business jumped 12.5% in Q3. As a result, I believe the stock will get a meaningful boost from the app’s rapid growth going forward.
GOOG has a very attractive forward price-earnings ratio of 20.6 times.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.