Artificial intelligence (AI) has captivated investors since ChatGPT burst onto the scene with its viral popularity in early 2023. Since then, big technology companies, often called the "Magnificent Seven" stocks, have duked it out with massive AI investments and rising growth expectations that carried the broader stock market to new highs.
Lately, however, volatility crept back into the markets, and many of these highfliers have sold off from their highs.
Remember that volatility is a feature of investing, not a bug. Nobody knows what stock prices will do in the short term, but the sell-off could be a great long-term buying opportunity for the right stocks.
Which Magnificent Seven stocks should investors focus on? Here's a prediction: Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT) will emerge as the AI stocks everyone wishes they bought during this sell-off.
Here is why.
Meta has the inside track on the AI race
Social media giant Meta Platforms has arguably everything a company needs to build a dominant business around artificial intelligence (AI) . You need a ton of data to train AI models, and Meta has tons of first-party data on the 3.27 billion people who log on to Facebook, Instagram, WhatsApp, or Threads daily.
AI models require tons of computing power. Nvidia has enjoyed tremendous success as the go-to supplier for AI chips. Meta has accumulated nearly 600,000 of Nvidia's flagship H100 GPUs and is designing its own custom chip.
Lastly, Meta has developed its own AI models. Llama is Meta's large language model, which it's implementing throughout its apps and making available to other developers to build on. Add it all up, and Meta is building an AI ecosystem over which it has complete control.
Not many AI technology companies can do it all like Meta can. For example, Nvidia's chips serve a specific purpose in AI: computing. Apple has excellent distribution through iOS devices but sought help from OpenAI's AI models . Alphabet has similar advantages to Meta, but it's facing regulatory scrutiny for its monopoly on internet search.
The best part about Meta is that it's already a great business that AI makes even better. Meta, already a force in digital advertising, launched AI tools for customers that boost ad effectiveness by helping match ads with their target audiences. Ad impressions grew 10% year over year in Q2, but the price per ad also increased 10%. Meta is already generating $150 billion in annual revenue, and analysts believe it will grow by double digits over the next four years.
Investors should see any sell-off as a long-term buying opportunity. The stock's valuation already looks reasonable, so investors don't need to be too picky. Shares trade roughly 25 times Meta's estimated 2024 earnings, and analysts believe those profits will grow at an annualized rate of 19% over the next three to five years. The resulting PEG ratio of 1.3 signals the stock is borderline cheap for its expected earnings growth, so this is a dip worth buying.
AI demand will grow Microsoft's cloud business
Microsoft is seemingly everywhere in technology, and AI is no different. The company is planting deep AI roots, including its exclusive partnership with OpenAI, its cloud platform Azure to meet AI's computing needs, and mission-critical enterprise software that gives Microsoft direct access to millions of customers worldwide. The cloud is already Microsoft's most significant and fastest-growing business unit, and AI could continue fueling rampant growth.
Microsoft's close ties to OpenAI include funneling all its computing through Azure. In other words, anyone who uses OpenAI's products is technically powering those applications through Azure.
That growth is already trickling through to Microsoft's cloud business. Due to AI demand , management reported that Azure's year-over-year growth exceeded Wall Street's expectations in Q2. Management noted on the call that it would have grown more, but there was more AI demand than available computing capacity. Microsoft is aggressively investing in data centers and AI chips to increase that capacity, which should translate to more revenue and earnings over the coming years. Strong AI execution could help push Azure closer to Amazon 's AWS in the global market. AWS is the leading cloud, but Azure's market share grew to 25% in Q1, an all-time high.
Microsoft's AI positioning and reputation as a blue chip technology stock have earned shares a hefty price tag. The stock's forward P/E ratio of 32 is a bit high for a business that analysts estimate will grow earnings at an annualized rate of 15% over the next several years. A high-quality company like Microsoft can stay expensive for a long time because most investors know and appreciate just how great a stock it is. The sell-off would be a great chance to scoop up shares at a fair price.
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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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