Look at the world around you, and you’ll quickly realize just how crucial technology is in our daily lives. Businesses that operate with tech at their core have become more important to the global economy. This is a trend that investors should follow, and they might want to put some money to work in this area.
If your goal is to gain portfolio exposure to the technology sector, then look no further than these two “Magnificent Seven” stocks.
Unrivaled reach
The two businesses that investors should buy right now are Alphabet (GOOGL 1.54%) (GOOG 1.72%) and Meta Platforms (META -1.73%), two of the most dominant internet enterprises in the world.
According to Alphabet CEO Sundar Pichai, the company has six products that each have at least 2 billion users. Meta isn’t too shabby, either, with a family of apps (Facebook, Instagram, WhatsApp, Messenger, and Threads) that combined have 3.29 billion daily active users.
Having such massive user bases gives these two businesses tremendous advantages. For starters, they both benefit from powerful network effects. More internet data and website content create more incentive for people to search the web, resulting in a more compelling value proposition for advertisers on Google. And because most of the people you know probably have an account with one of Meta’s social media apps, it encourages use of those platforms, too.
Having such broad reach allows Alphabet and Meta to continuously release artificial intelligence (AI) features and updates. The immediate feedback of usage trends can then inform product development decisions.
Minimal financial risk
Money can certainly be made in unprofitable businesses, provided that they continue growing sales rapidly and eventually get into the black. But a much safer way to allocate capital is to find companies that are already generating strong earnings, which can minimize risk.
Alphabet and Meta Platforms excel in this area. The former posted 34% year-over-year operating income growth in the third quarter, while the latter saw a 26% gain. Both businesses were able to expand their operating margins.
With the ability to also rake in copious amounts of cash flow, Alphabet and Meta have the resources to invest aggressively in technical infrastructure — things like servers, data centers, and network equipment. This bolsters processing power that helps them capture AI opportunities and continue staying at the cutting edge of this technology.
Even after making these sizable investments, the two companies are still able to return lots of capital to shareholders. In the past 12 months, Alphabet’s diluted outstanding share count was reduced by 2.2%, while Meta Platform’s share count shrunk by 1.6%. And earlier this year, they both initiated dividends for the first time, providing a small but dependable income stream for investors.
Are the valuations compelling?
It’s one thing to identify high-quality businesses that have competitive strengths and lots of earnings. It’s another challenge to make sure you can buy their shares at reasonable valuations.
Since the start of 2023, Alphabet and Meta have seen their stock prices soar 113% and 396%, respectively (as of Dec. 18). Those gains seem unbelievable, but even after such stellar performances, their valuations are far from expensive.
Right now, Alphabet shares have a forward price-to-earnings ratio of 23.6, while the multiple for Meta Platforms is slightly higher at 26.4. These valuations make these two companies the cheapest of the Magnificent Seven.
Investors who want to dip their toes in these waters should really consider starting positions in Alphabet and Meta Platforms.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
