Affordable Edge for "Magnificent Seven" AI Investment in 2025: Meta Platforms versus Alphabet's Competition
Affordable Edge for "Magnificent Seven" AI Investment in 2025: Meta Platforms versus Alphabet's Competition
This year, tech stocks have soared significantly, contributing to the S&&P 500's approximate 27% growth. Leading this charge are a select group of companies, colloquially known as the "Magnificent Seven," a nod to the 1960s Western. These tech titans have a history of robust earnings growth and continuous innovation, potentially paving the way for substantial revenue growth in the future.
Among these companies, you'll find familiar names like:
- Meta Platforms (META -1.65%) - The proprietor of social media apps such as Facebook.
- Alphabet (GOOG -1.16%, GOOGL -1.11%) - Overseeing Google and YouTube.
- Amazon - The dominating force in e-commerce and cloud computing.
- Apple - The iPhone's inventor.
- Microsoft - A software and cloud computing titan.
- Nvidia - The undisputed leader in the AI chip market.
- Tesla - The trailblazer in electric vehicles.
Their 2021 returns range from Microsoft's modest 19% to Nvidia's impressive 171%. This stellar performance has not only benefited existing shareholders but has also inflated the companies' valuations to some extent.
However, two Magnificent Seven stocks remain undervalued, and they're both focusing on the booming AI sector: Meta Platforms and Alphabet, trading at forward price-to-earnings ratios of 27 and 24, respectively. So, which company offers the superior AI investment opportunity for 2025?
The case for Meta
Meta manages some of the world's most popular social media platforms, including Facebook, Messenger, WhatsApp, and Instagram. An estimated 3.2 billion people use at least one of its platforms daily, generating billions in revenue from digital advertising space sales. Companies recognize the value in reaching customers through Meta's apps, as evidenced by the 19% year-over-year increase in advertising revenue to over $39 billion in the latest quarter.
Beyond advertising, Meta is heavily investing in AI. The recent development and release of the famous large language model (LLM) Llama have garnered widespread attention. Its open-source availability strengthens Meta's presence in the AI sector, positioning it as a possible leader in the near future.
AI could emerge as a significant growth catalyst for Meta. The company aims to launch AI-powered assistants and tools to enhance user experiences in various areas, from leisure to business demands. Although management cautions that these ambitious investments won't deliver immediate results, the potential long-term impact on user engagement is promising.
The case for Alphabet
Alphabet makes use of AI in a dual capacity - as a user and vendor. The company leverages its Gemini LLM to enhance Google Search, offering a more engaging and relevant search experience. Google Search, with its nearly 90% market share among search engines, has the potential to maintain its dominance if AI capabilities continue to improve. Features such as the AI Overview function, which sums up search-related information from multiple sources, have generated strong user engagement, further driving interest in Google Search.
Alphabet primarily derives its revenue from digital advertising sales. In the third quarter of 2021, Google's advertising revenue increased 10% to more than $65 billion. Alphabet's growing Google Cloud business is another source of revenue, with second-quarter revenue surpassing $10 billion and operating income topping $1 billion, both of which increased in the third quarter. Google Cloud customers can buy everything from AI chip computing time to access to a fully managed AI development platform named Vertex AI, highlighting Alphabet's advantage from its AI investments.
The superior AI investment opportunity
Before reaching my conclusion, it's essential to address potential risks associated with Alphabet. Currently, the company is facing antitrust charges, and the Department of Justice has proposed a break-up of the company. Although the legal battle is underway, Alphabet is determined to fight any decision deemed detrimental, and the current antitrust-related risks do not discourage me from considering investing in the stock.
Considering both candidates, I lean towards Alphabet. The company's momentum in the Google Cloud business justifies its stock price, and the AI build-out's early stages indicate that this momentum could persist, benefiting Alphabet's cloud business into the future.
Despite Meta's promising investment in AI with the release of the large language model Llama, its forward price-to-earnings ratio of 27 suggests that it might not offer as attractive an investment opportunity as Alphabet. Alphabet, with a forward price-to-earnings ratio of 24, is leveraging AI in both its search engine and cloud business, generating substantial revenue from digital advertising and Google Cloud. The company's strong position in the digital advertising market, coupled with its commitment to AI, positions Alphabet as a potential superior AI investment opportunity for 2025, despite the ongoing antitrust charges. In the realm of finance and investing, identifying undervalued stocks with strong growth potential, like Alphabet, can yield significant returns in the long term.