The Magnificent Seven is a group of seven mega-cap stocks that collectively account for more than one-quarter of the S&P 500 and almost half of the Nasdaq Composite. The seven companies are listed below (in alphabetical order), along with Wall Street's median 12-month price target and the implied upside from the current share price.
- Alphabet: $150 per share (15% upside).
- Amazon : $175 (36% upside).
- Apple: $200 per share (15% upside).
- Meta Platforms: $378 per share (26% upside).
- Microsoft: $400 per share (26% upside).
- Nvidia (NVDA -0.79%): $625 per share (50% upside).
- Tesla: $278 per share (14% upside).
Wall Street sees upside for all seven stocks, but the consensus is that Nvidia is the best buy of the bunch right now. Here's what investors should know.
Nvidia is a market leader in graphics and artificial intelligence
Nvidia specializes in accelerated computing. The company is best known for inventing the graphics processing unit (GPU), a chip optimized for complex workloads like rendering realistic graphics and powering artificial intelligence (AI) applications. But investors need to understand that Nvidia is more than a chipmaker. It is a full-stack computing company with platforms comprising hardware and software that address four large markets: data center, gaming, professional visualization, and automotive.
Nvidia first garnered brand authority with cutting-edge graphics in PC gaming, and its GPUs remain the gold standard in gaming and 3D design, but its chips have since become indispensable in data centers. Nvidia holds 95% market share in data center accelerators, and analysts estimate that its chips account for 80% to 95% of AI computing.
The seeds of that success were planted nearly two decades ago when visionary CEO Jensen Huang began diversifying the business beyond gaming. To quote Baird analyst Ted Mortonson, "Jensen understood where the market was going before the market even materialized." Huang had the foresight to invest not only in semiconductor design but also in supporting software. His excellent leadership positioned Nvidia as a one-stop shop for accelerated data center computing.
Nvidia has new revenue streams in software and services
Nvidia has long offered software tools that help developers build and deploy GPU-accelerated applications across various disciplines, including scientific computing and AI, but the company more recently doubled down on that strategy by branching into subscription software and cloud services.
For instance, DGX Cloud combines supercomputing infrastructure and software to help businesses build AI applications that address use cases across a range of industries, from healthcare and financial services to manufacturing and retail.
Additionally, Nvidia provides frameworks that allow businesses to build, customize, and deploy pre-trained models for generative AI. The service includes NeMo for large language model applications, BioNeMo for biotechnology and pharmaceutical applications, and Picasso for visual applications.
Similarly, Omniverse Cloud combines GPU-accelerated infrastructure and software that allows businesses to build 3D applications, generate synthetic data in virtual environments, and run physically accurate simulations. The first use case can be applied to the development of intelligent digital avatars, which can then serve as non-player characters in video games or customer service agents in the real world. The last two use cases are helpful in training and validating AI models for autonomous robots and self-driving cars.
Nvidia is growing at a phenomenal pace
Nvidia stunned Wall Street with its second-quarter report. Revenue rose 102% to $13.5 billion on record data center sales, gross profit climbed 225% to $9.5 billion as higher-margin software contributed more to the top line, and non-GAAP (adjusted) earnings soared 429% to $2.70 per diluted share as the company kept operating expenses in check.
A visual breakdown of the second-quarter income statement is shown below:
Image source: The Motley Fool.
Better yet, guidance implies a sequential acceleration in revenue growth to 170% in the current quarter. That momentum reflects "tremendous demand for Nvidia accelerated computing and AI platforms," according to CFO Colette Kress. That tailwind should persist for many years to come.
Nvidia stock trades at a premium
Nvidia values its addressable market at $1 trillion, and management attributes about $600 billion of that total to AI chips, systems, and software. That leaves the company well-positioned for future growth. Indeed, CFRA analyst Angelo Zino recently predicted that Nvidia would be the "biggest winner" from the AI boom.
However, investors should be aware of the pricey valuation. After climbing 233% in the past year, Nvidia stock now trades 31.7 times sales, a premium to the three-year average of 23 times sales. Shares also trade at 19 times forward sales, a premium to the three-year average of 17.4 times forward sales.
With that in mind, I would probably wait for a cheaper entry point. But I think risk-tolerant investors can buy a very small position in Nvidia stock today as long as they are prepared to hold the stock for at least three to five years. Volatility is to be expected in the coming months, and there is no guarantee shareholders will see 50% returns any time soon.
