One 'Magnificent Seven' Stock to Buy on the Dip

As earnings season progresses, investors are eagerly anticipating updates about the performance of their favorite companies. A significant number of the "Magnificent Seven" stocks will be unveiling their financial results soon.

These tech giants have established themselves as leaders in their fields, placing them high on many investors' lists. However, these companies often have high price valuations that can be a deterrent.

Fortunately, now is a great time to consider purchasing one Magnificent Seven stock without hesitation—and surprisingly, it is not Nvidia.

Wall Street's Response

An essential member of the Magnificent Seven is Alphabet (GOOGL). As a company worth $2.3 trillion, Alphabet frequently attracts attention. Following its fourth-quarter 2024 financial results, Alphabet's stock dropped 7% on February 4, indicating that something in the report did not meet analysts' expectations.

In the fourth quarter, Alphabet's revenue grew by 12% year-over-year, reaching $96.5 billion. Although this is an impressive figure, it still fell short of expectations by about $90 million. Investors were especially unsettled by a larger-than-anticipated shortfall in the Google Cloud division.

Despite these concerns, Alphabet exceeded earnings expectations, with diluted earnings per share (EPS) jumping 31% to $2.15 in Q4. Over the last decade, Alphabet has demonstrated an ability to increase earnings swiftly compared to revenue, showcasing its efficient scalability.

Market reactions might have also been influenced by Alphabet's announcement regarding planned capital expenditures for 2025, projected at $75 billion compared to the $59 billion that analysts had anticipated. This indicates that Alphabet is committed to significant investments in growth.

CFO Anat Ashkenazi stated during the Q4 2024 earnings call, "As we expand our AI efforts, we expect to increase our investments in capital expenditure for technical infrastructure, primarily for servers followed by data centers and networking."

Looking Beyond Immediate Results

In the fast-paced world of quarterly reporting, it's common for investors to react impulsively to short-term results. However, successful investors tend to maintain a broader perspective that emphasizes long-term growth. When looking at the bigger picture, it's clear how valuable a business like Alphabet truly is.

Even at its current size, Alphabet has ample room for growth. The global digital advertising market is forecasted to double and reach $1.2 trillion by 2030. As a leading player in this market, Alphabet is well-positioned to capitalize on the growth due to the popularity of its internet offerings.

Financially, Alphabet is quite robust. During the fourth quarter alone, it generated an impressive $99 billion in annualized free cash flow, even after substantial investments in growth initiatives. This cash flow has allowed Alphabet to fund $62.2 billion in share buybacks and distribute $7.4 billion in dividends over the past year.

Investors do not face substantial financial risk when owning shares of Alphabet. The company's balance sheet remains strong, with cash, cash equivalents, and marketable securities exceeding total long-term debt by $84.8 billion.

Seize the Opportunity

It is not often that investors have the chance to acquire top-tier businesses at attractive prices. Yet, this is exactly what we see with Alphabet at the moment.

Currently, Alphabet's shares are about 10% down from their peak, trading at a forward price-to-earnings ratio of 20.6. This undervaluation appears unwarranted considering Alphabet's strong market position.

Analysts project that Alphabet's EPS will grow at a compound annual growth rate of 13.6% over the next three years. This optimistic forecast supports the idea that the stock is worth more than its current valuation.

Now is the time to consider purchasing shares in this Magnificent Seven company during this dip.

Suzanne Frey, an executive at Alphabet, is a member of a prominent board. Neil Patel and his clients have no positions in the stocks mentioned. The context provided does not constitute investment advice.

stocks, investing, earnings