My Top 3 Megacap Stocks to Buy After Microsoft's Latest Pullback

Most stocks are down since late January and Microsoft (NASDAQ: MSFT) largely led the charge lower. All told, shares of the software giant are down 27% from their October peak. That's huge.

However, this may be a case of too much guilt by mere association. Between being similarly sized and betting heavily on the artificial intelligence (AI) opportunity at hand, most megacap names have suffered setbacks similar to Microsoft's. The so-called "Magnificent Seven" stocks, for perspective, have lost an average of about 10% of their value just since late December. That's quite a bit for that short amount of time, especially in light of the heroic gains these tickers had been putting up until then.

Experienced investors know, of course, that this exaggerated weakness is a long-term buying opportunity. To this end, here are the three most beaten-down megacap stocks I'd buy at their current discounts.

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Broadcom

Computing processor manufacturer Nvidia may have been the focal point of AI's initial mainstreaming. Its high-performance processors wouldn't have been able to do much of anything, however, without some serious help from Broadcom (NASDAQ: AVGO).

Simply put, Broadcom makes much of the tech that connects the stacks and stacks of computer processors in a data center into a single neural network. This includes Ethernet switches, fiber-optic networking equipment, wireless connectivity solutions, and more, including the software needed to make it all work.

It's not the only name in the business to offer this tech. It is one of the biggest though, doing $63.9 billion worth of business last fiscal year, up 24% from 2024's tally. Most of that growth was driven by AI-related hardware all year long.

There's no slowdown on the horizon either. The company's looking for top-line growth of 28% for the quarter currently underway, while analysts expect full-year sales growth of 64% this year, followed by 47% revenue growth next year. This is growth that's projected to have an even bigger positive impact on Broadcom's bottom line because demand for artificial intelligence is just that strong. In fact, Precedence Research predicts the global AI hardware market is poised to grow at an average annualized pace of 14% through 2035.

Even with this stock's 20% slide from its December high, it's still pretty expensive, priced at just under 30 times this year's projected per-share profits of $11.23. This is one of those scenarios, however, where you can and should be willing to pay a premium price for a proven opportunity.

Oracle

While AI hardware makers like the aforementioned Nvidia and Broadcom have dominated most of the financial media's coverage of late, these certainly aren't the only names worth considering as prospective investments. Cloud-based access to software, apps, databases, and simple file storage is still a viable business. Enter Oracle (NYSE: ORCL).

If you've been keeping tabs on Oracle, then you likely know this stock's down by more than half since its September high. Some of that steep sell-off is the result of what happened right before that peak. Shares surged the day before in response to the company's projection that its AI-related cloud infrastructure business is set to more than quintuple over the next five years. The surge, however, also turned out to be the last bullish hurrah, starting a wave of profit-taking that eventually took on a life of its own.

In much the same way that a swell of seemingly good news created a pre-pullback peak for this stock though, a streak of strong selling stemming from broad AI spending worries in late January and early February -- around the same time Oracle issued $20 billion worth of new shares as well as $25 billion in new debt -- may have actually brought all of this concern to a head, producing a capitulation for the stock.

Shares haven't lost any more ground since then. In fact, they've logged a bit of a gain, boosted by a recent upgrade from analysts at J.P. Morgan and a price target raise from Oppenheimer, with both arguing that the company's recently reported fiscal third-quarter results suggest the steep sell-off was unmerited. Its business backlog (described as "remaining performance obligations") grew another $30 billion to $553 billion during the three months in question, confirming that the business Oracle is investing so heavily in now is there to be won. For perspective on that number, Oracle's expected to report revenue of $105 billion this fiscal year.

Microsoft

Finally, Microsoft hasn't just been the bearish pace-setter for megacaps of late. Its sizable sell-off is a buying opportunity in and of itself.

Most of Microsoft stock's sell-off since October has taken shape just since the end of January, after the company announced a massive amount of spending on AI, which was matched by slowing AI growth. Specifically, growth in its cloud business (where its AI business is reflected) slowed year over year despite a 66% year-over-year increase in capital expenditures -- to $37.5 billion -- versus analysts' consensus capex forecast of only $36.2 billion.

Now take a closer look at the details of the quarter in question. It's not a lack of demand. It's a lack of capacity for Microsoft to meet demand for its artificial intelligence and related offerings. The company's backlog of business more than doubled year over year to $625 billion last quarter, soaring 59% just from the previous quarter's reported remaining performance obligations of $392 billion. That's also nearly twice the amount of total revenue the software giant is expected to report for the entirety of the current fiscal year, for reference.

Don't misunderstand. There's an argument to be made that Microsoft should have foreseen and been prepared to deliver on the exploding demand for AI infrastructure, rather than risk losing current and future market share to a rival.

The situation the entire technology industry is facing right now, however, is somewhat unprecedented as well as unpredictable. Investors unfairly punished the company for facing a challenge that's largely out of its control, while simultaneously ignoring that Microsoft's still expected to report revenue growth of about 16% this year and next year. That's pretty solid for a company of Microsoft's sheer size.

JPMorgan Chase is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.