3 Reasons Why This "Magnificent Seven" Stock Is a Buy

3 Reasons Why This “Magnificent Seven” Stock Is a Buy

The companies in the Magnificent Seven had an outsized impact on the stock market’s 2023 performance. And these stocks may deliver an encore in 2024, given Nvidia’s latest outstanding quarterly report.

One Magnificent Seven stock to own is Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG). Like many of its peers working on artificial intelligence (AI), the Google parent saw its stock price zoom from a 52-week low of $88.58 last February to a high of $153.78 on Jan. 29.

But Alphabet shares have now retreated from this high, creating a buy opportunity. Here are some reasons it makes sense to pick up and hold shares of this Magnificent Seven stock.

Reason 1: Artificial intelligence

Alphabet is known for its ubiquitous Google search engine and digital advertising business. But its AI technology, now called Gemini, is what’s likely to help drive the company’s next growth phase.

CEO Sundar Pichai stated, “I believe the transition we are seeing right now with AI will be the most profound in our lifetimes, far bigger than the shift to mobile or to the web before it.”

Gemini is already helping Google’s search engine perform 40% faster. These kinds of improvements aid Google in maintaining its leadership in search, where its market share exceeds 90%.

AI is also assisting Alphabet’s advertising products. The technology can create digital ads automatically for marketers, and improve advertising performance in real time by constantly analyzing which ads are working best.

These AI capabilities make working with the company easy and efficient for Alphabet’s advertising customers. This, in turn, helps Alphabet grow digital ad sales, which accounted for $65.5 billion of its $86.3 billion in fourth-quarter revenue. Its AI improvements can also enable Google to maintain its digital advertising dominance, where it’s tops in global market share.

Reason 2: Cloud computing

Complementing its AI technology is Alphabet’s cloud computing platform, Google Cloud. This platform employs custom infrastructure explicitly designed for AI technology and makes it available to Google Cloud customers who want to create their own AI-based solutions. These clients include telecom giant Verizon and fast-food veteran McDonald’s.

This symbiotic marriage of cloud computing and AI helped Google Cloud hit $9.2 billion in Q4 sales, up from $7.3 billion in the prior year. Alphabet’s cloud business has grown in importance — Google Cloud sales climbed from contributing 4% of Q4 revenue in 2018 to over 10% in 2023.

Moreover, Google Cloud’s Q4 operating income reached $863 million compared to a loss of $186 million in 2022. This division’s transition to profitability is important.

That’s because Alphabet’s Q4 capital expenditures were $11 billion, due primarily to the hardware required for its AI infrastructure. And those capital expenses are expected to increase in 2024.

Even so, the costs are essential for Alphabet to grow its AI abilities. As Pichai noted: “This infrastructure is also key to realizing our big AI ambitions. It’s a major differentiator for us.”

Reason 3: Subscription services

Google Cloud’s sales help Alphabet expand its revenue streams beyond advertising. Another of the tech giant’s businesses is also helping to diversify revenue, and it’s from subscribers to Alphabet’s premium services.

This subscription-based business generates income from recurring fees charged to access various offerings. For example, YouTube’s premium content allows ad-free viewing of TV shows, movies, and sports.

Another example is the company’s Google One service, which provides storage space in the cloud for consumers’ digital items, such as photos. Google One had nearly 100 million subscribers by the end of 2023.

When Alphabet first broke out YouTube and Google Cloud’s Q4 sales in its 2019 earnings report, subscriptions revenue was lumped into a “Google other” category with several non-advertising products, such as Google Play’s app store sales. This category generated revenue of $17 billion for all of 2019.

In 2023, Alphabet’s management revealed subscriptions revenue alone generated $15 billion. Rising subscription revenue is a boon for Alphabet because it creates consistent, dependable income. It’s the antithesis of advertising revenue, which can fluctuate substantially due to factors such as seasonality.

Thanks to its AI tech combined with a growing share of revenue outside of advertising, Alphabet saw Q4 revenue increase by double-digits to $86.3 billion, up from $76 billion in 2022. This success contributed to Wall Street analysts predicting a median price target for Alphabet stock of $165, indicating a belief in more upside for the company’s shares.

With all of these factors in its favor, Alphabet is one “Magnificent Seven” stock to buy and hold for the long haul.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet, Nvidia, and Verizon Communications. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.