Are the Magnificent 7 tech stocks still magnificent? That’s the big question now for investors. These tech giants led the charge in last year’s stock market boom, but some are hitting roadblocks this year. While they nearly doubled the NASDAQ’s 54% growth in 2023, it appears that several of them have now topped out.
But it’s not the end of the road for the Mag 7. Rather, it serves as a reminder for investors to exercise caution and conduct thorough research before making any moves. These companies boast impressive advantages, from their dominant market positions to their deep financial reserves and stellar product offerings. There’s no denying why they rose to the top. And while some may be slowing down, others are still rising – suggesting there are still solid opportunities in the mega-cap tech sector.
Watching the tech giants for the investment research firm Needham, sector expert Laura Martin has looked under the hood at both Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META), the parent companies of Google and Facebook respectively, and her analysis comes down to a clear conclusion as to just which of these shares is the superior tech stock to buy. Let’s take a closer look.
Alphabet
In non-judgmental alphabetical order, we’ll start with Google’s parent company, Alphabet. This tech mega-firm is one of the handful of trillion-dollar-plus companies trading on Wall Street; its $1.75 trillion market cap makes it the fifth-largest publicly traded company in the world. Alphabet’s chief asset is Google, the world leader in internet searching; the company also owns YouTube, the leading online video content search engine.
Alphabet’s size and success are built on its successful monetization of the internet search niche, but the company’s other subsidiaries show that it is branching out into several tech fields – and is developing a strong emphasis on AI. The company’s autonomous vehicle venture, Waymo, has already put self-driving cars on the streets of San Francisco, while its Bard chatbot was created to make use of generative AI technology. Google has gotten some recent positive press for the development of its Large Language Models (LLMs), a service offered through the Google Cloud that makes use of both AI and natural language processing to facilitate text translations, as well as the creation of new texts in multiple languages.
On the negative side, we cannot discuss Google’s AI ventures without mention of the company’s recent swing-and-miss with Gemini, the interactive generative AI bot that made the news for its unintentionally amusing misinterpretations of user requests – particularly, its seeming inability to generate images of white people.
That sort of glitch can be fixed, and Alphabet rests securely on a solid financial foundation. The Google search engine is the company’s main revenue driver, and controls more than 83% of the online search market – along with the consequent rewards of ad monetization. The nearest competitor, Microsoft’s Bing, has a 9% share in the niche.
In actual numbers, Alphabet reported a 13% year-over-year gain in revenue in 4Q23, for a total of $86.3 billion at the top line. The quarterly revenue beat the forecast by $1.04 billion. Looking at Alphabet’s bottom line, we find that the company reported $1.64 in diluted EPS, by GAAP measures, and beat the estimates by 4 cents per share.
For the last 12 months, GOOGL shares have gained 54%, outpacing the NASDAQ’s 45% gain over the same period.
Analyst Laura Martin, in her coverage of Alphabet for Needham, notes several advantages for the company that make it a top pick for her. She points out increased ad spending during this election year, and the accretive value of AI for Google.
“GOOGL is our top large cap stock pick for 2024, owing to a stronger macro backdrop, record political ad spending, data advantages, and GenAI (which lowers op costs and drives rev upside structurally)… We believe that GOOGL’s #1 upside value driver over the next 3-5 years will be its proprietary large language models (LLMs), as thousands small and medium-sized businesses build apps on LLMs. GCS (Google Cloud) will generate revs from LLMs and the apps that are built on them, in our view. Generative AI requires a constant inflow of millions of data points each day to keep an LLM up to date, and GOOGL ingests more data than its competitors, thanks to Search and YouTube,” Martin explained.
Quantifying her bullish stance, Martin gives Alphabet stock a Buy rating, with a $160 price target that implies ~15% share gain in the next 12 months. (To watch Martin’s track record, click here)
The consensus view on Wall Street is also bullish for GOOGL shares, with the 37 recent analyst reviews breaking down to 29 Buys and 8 Holds for a Strong Buy rating. The stock is selling for $139.73, and the average target price of $164.59, slightly higher than Martin’s, suggests a potential one-year upside of ~18%. (See GOOGL stock forecast)
Meta Platforms
The second Magnificent 7 stock that Martin looks at is Meta, the holding company behind Facebook, Instagram, Messenger, and WhatsApp. Meta is the sixth company to hold a market cap more than $1 trillion; the company currently boasts a market cap of $1.26 trillion and is the sixth-largest company traded on Wall Street.
The foundation behind that trillion-dollar edifice is based on social media. Meta boasts strong audience numbers across its platforms, the bread and butter in the social media business – and an asset that drives monetization efforts. In the company’s last quarterly report, for the 4Q23, the ‘family daily active people,’ or DAP, was reported at 3.19 billion for the month of December, while the ‘family monthly active people,’ MAP, came in at 3.98 billion for that month. These are key metrics, tallying up the total number of users across all of the company’s platforms. We should remember that the current global population is estimated at 8.1 billion – and Meta’s monthly active people number nearly half the population of the entire world.
The larger part of Meta’s audience is found on Facebook. The company’s flagship app boasted a daily active user, DAU, figure of 2.11 billion this past December and a monthly active user, MAU, of 3.07 billion. Few companies, of any sort, can boast of audience numbers on this scale.
While these numbers will provide solid support for Meta, the company does face a serious headwind as 2024 goes on – one related to Alphabet, above. Google, Alphabet’s main subsidiary, is changing its cookie policy; that is, altering its rules for the use of user-tracking software tools. Starting in this 1Q24, Google will no longer support third-party cookies on its Chrome browser, a change that will impede monetization efforts from companies that use those cookies – a category that includes social media giants, and Meta’s platforms are not exempt.
Still, Meta does have solid resources to face the challenge. The company reported $40.11 billion in revenue for 4Q23, a total that was up 25% from the prior-year period and was $940 million better than had been anticipated. Meta reported a GAAP EPS of $5.33 per share, surpassing estimates by 39 cents per share.
Along with those sound results, Meta also announced the initiation of its first common share quarterly dividend. The payment was set at 50 cents per share, to go out on this coming March 26; looking ahead, the annualized rate of $2 per share gives a modest forward yield of 0.4%. The key point here is not the low yield, but rather, the company’s confidence in initiating the dividend payment. Meta accompanied the dividend announcement with an increase of $50 billion in the authorization for share repurchases.
Despite Meta’s undoubted successes, Needham’s Laura Martin does not recommend buying this mega-cap social media/tech firm. She sees too many headwinds piling up, including Google’s new cookie policy and increased content competition form the likes of YouTube and Tik Tok.
“We recommend investors use meta as a source of funds because: 1. GOOGL has announced that, starting in 1Q24, it will deprecate Cookies in its Chrome browser, which impacts both targeting and privacy settings. When AAPL’s iOS transitioned its privacy settings from IDFA to ATT, META disclosed that their revs fell by $10B over the first 12 months. Importantly, META’s distribution is virtually all through iOS and Android, making META the victim of unfavorable rule revisions. 2. Similarly, content is created by users/influencers who can exit to TikTok, YouTube, etc. 3. Finally, we worry that negative network effects driven by competition from TikTok will lower META’s value,” Martin opined.
To this end, Martin rates Meta shares an Underperform (i.e. Sell), without suggesting a price target.
Compared to Wall Street generally, Martin is the outlier here. Meta shares have 43 recent analyst reviews, including 40 Buys, 2 Holds, and 1 Sell, for a Strong Buy consensus rating. The average price target of $528.80 and current trading price of $495.27 together point toward a one-year upside of ~7%. (See Meta stock forecast)
And now the verdict is in – according to the Needham view, Alphabet is still Magnificent, and is clearly the superior tech stock for investors to buy today.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
