If I Could Own Only 1 "Magnificent Seven" Stock for the Next 10 Years, It Would Be This One.
Key Points
YouTube, Waymo, and Google Search would be exceptional on their own, but they all fall under the Alphabet umbrella.
While capital expenditures reduce free cash flow, there are very few businesses that are better equipped than Alphabet to turn AI spending into lasting profits.
The current valuation makes Alphabet look like a fantastic opportunity for patient investors.
- 10 stocks we like better than Alphabet ›
The "Magnificent Seven" combined represent more than one-third of the entire market capitalization of the S&P 500 index. When investors call out concentration at the top, it's these businesses that get the finger pointed at them. Seven companies have an outsize impact on equity returns.
But this group is separated for a reason. While each business is unique, they are characterized by industry dominance, technological prowess, incredible profits, and a huge focus on artificial intelligence (AI). And they operate from a position of financial strength.
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If I could own only one Magnificent Seven stock for the next decade, it would be this one. It might be the ultimate technology enterprise to buy.
Image source: The Motley Fool.
Examine Alphabet's key business lines
In my view, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) shines brighter than its peers. This company doesn't make money from a single activity. It's a comprehensive technology juggernaut; just look at the key business lines.
YouTube is one of the most valuable segments. Investors shouldn't downplay how successful it has become.
According to Nielsen data, YouTube commanded a 14.2% share of daily TV viewing time in the U.S in July. It has had a sizable lead on Netflix in this regard for quite some time. And it monetizes that viewership mainly through ads, with some help from subscriptions.
Then there's Waymo, which is winning the autonomous driving race. Last month, this service was completing 500,000 rides per week, running laps around rival Tesla. Waymo is currently available in 15 U.S. cities, with plans to expand domestically and internationally.
We can't forget the company's crown jewel, Google Search. This is what put the business on the map. It continues to dominate today, representing 53% of Alphabet's revenue. The platform handles billions of queries each day.
Google Search, which has a commanding 90% market share, possesses a robust network effect. It gets better with every query, which constantly improves the algorithm. That further drives greater usage. Ultimately, advertisers value this.
Taken together, Alphabet benefits from multiple secular trends. Streaming entertainment, autonomous vehicles, and digital advertising are notable growth drivers that will propel the business for years to come.
The future is in the cloud
Two other powerful secular tailwinds have yet to be discussed: cloud computing and AI. The shift of IT spending to the cloud has lifted Google Cloud to new heights. Its revenue totaled $24.8 billion in the second quarter (ended June 30), up 82% year over year. And that figure is 1,081% higher than seven years before.
Its profits are also surging. Operating income came in at $8.8 billion in Q2, more than tripling year over year. That's the result of having a scale advantage. Google Cloud's two larger rivals understand this.
Of course, AI has started to play a bigger role here. Alphabet is leaning into its advantage to ride the wave. It has a full-stack playbook, providing its own chips, training its own models, running its own data centers, and offering consumer and enterprise products and services.
Alphabet is one of the major hyperscalers, as it plans to spend $200 billion (at the midpoint) on technical infrastructure in a race to establish itself as a leader in the age of AI. Heightened capital expenditures (capex) have dealt a direct blow to free cash flow, which turned negative in Q2. And the business is taking on more debt to fund the build-out.
This just means that investors have to be extremely patient with Alphabet, perhaps more so than at any point in history. How the AI capex boom plays out is still an open question. But this company is in an extremely favorable position. There are very few businesses that are better equipped to turn AI spending into lasting profits.
With Alphabet's forward price-to-earnings ratio of 22.8, maybe the market is underestimating it. For patient investors with a 10-year view, this looks like a fantastic opportunity.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Netflix, and Tesla. The Motley Fool has a disclosure policy.
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