The “Magnificent Seven” Stocks Have Seen Valuations Tumble. Stocks to Avoid or Once-in-a-Decade Buying Opportunity?

Several years ago, investors may have only looked at the world's biggest tech stocks individually. In recent years, however, these market behemoths have become part of an unofficial but exclusive group: the "Magnificent Seven," inspired by the 1960 Western.

These stocks are Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA).

These players have led the S&P 500 higher during this artificial intelligence (AI) boom as they each are involved to a certain degree in this high-growth space. In recent months, though, various elements have weighed on AI stocks, and that's brought down valuations of most of these players. At levels that are, in the case of certain "Magnificent Seven" stocks, dirt cheap, is this a once-in-a-decade buying opportunity? Or should you avoid these tech stocks right now?

Image source: Getty Images.

Headwinds that interrupted the momentum

So, first, let's consider the headwinds that have interrupted this positive momentum. Investors worried about the high valuations of these stocks last year and the possibility that a bubble might have been forming. Then, this year, concerns mounted that the billions of dollars in tech spending on AI infrastructure may be too much, with a revenue opportunity that won't make it all worthwhile. Meanwhile, ongoing conflict in Iran and higher prices in the U.S. added to uncertainty, pushing investors to favor "safer" stocks, such as pharma players, over AI names.

As a result, over the past year, forward price-to earnings estimates for every "Magnificent Seven" player -- except Apple -- have fallen in the double digits. And today, some of AI's biggest stars are trading at dirt cheap levels, as we can see in the chart below.

AMZN PE Ratio (Forward) data by YCharts

Now, let's consider our question: With valuations at such levels, is this a rare buying opportunity or should you worry about the current environment and avoid these players?

A long-term view

AI stocks have faced headwinds, and this may continue. But it's essential to keep in mind that investing successes are built over the long term, and so far, the long-term AI growth story remains intact. Though the AI boom has been going on for about three years, the technology is actually in its early stages of usage. Companies and individuals are just beginning to apply AI to their needs, and this suggests that revenue growth is only getting started. AI needs chips, memory, cloud service providers, and other elements to operate, meaning that those selling these products and services will generate revenue gains throughout the AI story -- not just during the training of AI models.

So, investors shouldn't entirely avoid this group of stocks. Does this mean you should scoop up shares of all of them? Not necessarily. Though we tend to think of these stocks as a group, when we're getting ready to invest, it's time to look at each one individually.

Which stocks should you buy?

These players each have proven their ability to generate earnings growth over time and have demonstrated success in their specialty areas. But that doesn't make each one a buy today for every investor. It's important to keep in mind your own investing style and to consider the company's presence in the AI market, as well as its risk and overall long-term prospects. For example, a very cautious investor who doesn't want to bet too heavily on AI may favor Amazon over Nvidia due to the former's broad businesses across e-commerce and even into healthcare. But investors aiming to maximize their benefits in the next phase of AI growth may prefer Nvidia, a company that has built an AI empire and is well-positioned to dominate for years to come.

So, investors, seeing the "Magnificent Seven" at today's levels, should carefully consider their own investing priorities before choosing one or more of these stocks to buy. That said, overall, these "Magnificent Seven" stocks that have seen valuations drop over the past year look very reasonably priced, making them fantastic buys as long as they fit in with your general investing style and strategy.

All of this means that today, even in an uncertain market, investors looking for long-term growth should take advantage of what may be a once-in-a-decade buying opportunity and pick up "Magnificent Seven" stocks that suit their style.

Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.