The Magnificent Seven has had more than its fair share of the spotlight in recent years, with outsized growth from the mega-cap bunch consistently impressing the market and leading to huge gains.
Still, several members of the bunch – Microsoft MSFT and NVIDIA NVDA – trade at highly attractive valuations, an important hurdle to clear given increased market volatility as of late.
Microsoft’s cloud growth and NVIDIA’s unmatched hardware dominance in the AI era mean investors are still getting rock-solid earnings power at multiples that look very reasonable relative to their long-term growth trajectories.
NVIDIA’s Unmatched Dominance
NVIDIA’s recent results comfortably cleared already high expectations. Revenue surged 106% year over year to $96.2 billion, whereas adjusted EPS jumped 120% to $2.22.
As expected, Data Center results remained the highlight of the release. Data Center revenue totaled $89.0 billion, up a triple-digit 117% year over year and 18% sequentially, handily clearing our consensus estimate of roughly $85.1 billion.
Overall sales growth has been historically strong, reflecting a trend that we likely won’t see from another company its size anytime soon.
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The stock is currently a Zacks Rank #1 (Strong Buy), with EPS revisions continuing the multi-year trend of moving higher on robust results. The stock undoubtedly continues to reflect one of the strongest bets on the continued AI craze, underpinned by red-hot demand that isn’t going to slow anytime soon.
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Shares currently trade at a 16.4X forward 12-month earnings multiple, reflecting a high discount relative to the 37.7X five-year median. Surging growth has kept the multiple attractive, with current Zacks Consensus EPS estimates suggesting 93% earnings growth in its current fiscal year and 66% in its next.
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Microsoft Eases Cloud Concerns
Microsoft similarly posted strong results in its latest release, with sales up 18% YoY and earnings up 23% YoY. It delivered strong Cloud results, a key benchmark that has been watched closely amid the billions it’s been investing in AI infrastructure. Its revenue growth hasn’t been as impressive as NVIDIA, of course, but it’s still posted consistent double-digit growth rates since early 2024.
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Microsoft’s Intelligent Cloud results include Azure, its cloud computing platform that provides AI computing power to businesses. Intelligent Cloud revenue came in at $39.3 billion, beating our consensus estimate handily and growing at an accelerated rate of 32% YoY.
Shares currently trade at a 24.1X forward 12-month earnings multiple, reflecting a solid discount relative to the 29.6X five-year median. Shares got even cheaper earlier this year as worries about its Cloud business took hold, but the multiple remains at levels we haven’t consistently seen in years.
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The near-term earnings picture also remains strong for MSFT, with expectations trending higher across the board over recent months. Our current consensus estimates suggest nearly 10% earnings growth in its current fiscal year before accelerating to a 19% YoY growth rate in its next.
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Bottom Line
Despite strong share gains in recent years, both Microsoft MSFT and NVIDIA NVDA trade at attractive valuations, with neither reflecting overly stretched growth stories. That said, their stories do increasingly revolve around continued enterprise AI adoption and the broader buildout, but guidance from each and results from other companies involved in the trade don’t suggest the frenzy slowing down anytime soon.
For those seeking a much less-sensitive Magnificent Seven member to the AI trade, Apple AAPL remains a top-tier option. Apple does trade at an elevated premium relative to MSFT and NVDA, though that’s a reflection of the safety net it enjoys, with Apple’s stability largely unmatched given an entrenched consumer base.
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This article originally published on Zacks Investment Research (zacks.com).
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