If There Were a “Magnificent Seven” Purely for AI Stocks, These Would Be My Top Picks

The “Magnificent Seven” includes some of the largest tech-oriented companies. But not every Magnificent Seven component could be considered a true artificial intelligence (AI) play.

If there were a new Magnificent Seven purely for AI stocks, then I would keep Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META), but swap out Alphabet, Amazon, Apple, and Tesla for Advanced Micro Devices (NASDAQ: AMD), Taiwan Semiconductor Manufacturing (NYSE: TSM), Adobe (NASDAQ: ADBE), and Deere (NYSE: DE).

Here’s why these seven companies are all excellent ways to invest in AI from various industries.

Image source: Getty Images.

1. Nvidia

The poster child of the AI craze, Nvidia’s growth is mostly due to sales to data centers. Faster and more secure processing power is needed to support complex AI solutions. And that’s exactly what Nvidia is giving the industry.

The greatest risk to Nvidia is a slowdown in demand from its data center business. Operating income from its compute and networking segment (led by data centers) increased more than sixfold between fiscal 2024 and fiscal 2023.

If demand slows, the growth could shrink as fast as it rose. However, an extreme slowdown is unlikely if AI investments pay off for Nvidia’s customers.

2. Meta Platforms

Meta Platforms plans to spend $10 billion on Nvidia GPUs by the end of 2024. To quote Nvidia CFO Colette Kress on the Q4 fiscal 2024 earnings call:

Companies from search to e-commerce, social media, news and video services and entertainment are using AI for deep learning-based recommendation systems. These AI investments are generating a strong return by improving customer engagement, ad conversation, and click-through rates. Meta in its latest quarter cited more accurate predictions and improved advertiser performance as contributing to the significant acceleration in its revenue.

Meta is leveraging AI to boost user engagement, improve its algorithm, and better align ads to interested users. Instagram has become arguably the most valuable digital real estate in the world, and will likely stay that way thanks to Meta’s AI investments.

3. Microsoft

The third and final Magnificent Seven stock that also deserves to be in the AI Magnificent Seven is Microsoft. The company’s results show how AI can improve performance and accelerate growth even from established solutions.

Microsoft Copilots for Microsoft 365, GitHub Copilot, Security Copilot, Azure AI, and more are some of the many ways Microsoft uses AI to improve solutions without breaking what already works.

Microsoft makes so much money that it can invest in AI, fund its long-term growth, and still have plenty of cash to buy back stock and raise its dividend. The company is positioned to continue monetizing AI across business-to-business and business-to-consumer platforms.

4. Advanced Micro Devices

AMD often traded in tandem with Nvidia, but the company is actually quite different. For one, AMD isn’t growing as fast — yet. However, optimistic investors believe it can unlock explosive growth by competing with Nvidia in the GPU market for AI applications and CPUs for AI-enabled PCs.

In 2023, data center revenue grew just 7.5% year over year and made up less than 29% of total revenue. So while AMD’s growth is expected to happen, Nvidia’s growth is occurring right now.

AMD will have to deliver to justify its lofty valuation, but it’s certainly one of the most innovative and exciting AI plays out there for risk-tolerant investors.

5. Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing, commonly known as TSMC, is perhaps the safest way to invest in the AI-fueled semiconductor space.

TSMC manufactures chips for Nvidia, AMD, Broadcom, Intel, and others. It’s a similar dynamic to Apple, which designs its products but relies on its suppliers for materials, manufacturing, and assembly.

While these suppliers are usually low-margin, high-volume businesses, TSMC fabs handle some of the most complex and precise workflows in the world. TSMC is compensated accordingly, with an operating margin that has mostly ranged from 35% to 50% over the last decade — far higher than your typical manufacturer.

In this vein, TSMC wins as long as chip demand goes up. It doesn’t matter if AMD takes market share from Nvidia, so long as the industry is growing.

TSMC is not nearly as expensive as other top chip stocks, with a forward price-to-earnings ratio of just 21.7.

TSM PE Ratio (Forward) Chart

TSM PE Ratio (Forward) Chart

6. Adobe

It wasn’t long ago that Adobe’s growth was slowing. Subscription-based software-as-a-service (SaaS) business models are great for their consistent revenue. However, innovation and product improvements are needed to retain and grow the customer base, as well as justify price increases. AI has opened the door to some of Adobe’s biggest leaps in years.

About a year ago, Adobe released Firefly, its generative AI tool for Creative Cloud, and many other products. The impact is already visible in Adobe’s numbers, but the company is spending a lot of money to roll out these tools, which is straining profits.

Adobe is in customer acquisition mode, hoping to boost Firefly users and grow engagement as quickly as possible. It’s a good long-term strategy that focuses on where Adobe could be several years from now, not on where it is today. Patient investors may want to consider buying Adobe now, with the understanding that Wall Street may sell the stock if Adobe puts up weak quarterly results.

7. Deere

You may be wondering how we went from hypergrowth chip stocks to a tractor company. Well, part of the reason was to spice up the list with something outside the tech sector. Deere is a sleeper AI play — and has been for some time now.

Deere released its Smart Industrial strategy in 2022. And it’s already having an impact on its results. The company is betting that farms will become increasingly automated in the future. Examples would include automated crop spacing, how much fertilizer to use and where, and even a fully autonomous tractor.

Buzzwords aside, the idea is to use technology to lower costs and boost crop yield. It doesn’t really matter how it’s packaged, so long as these tools are boosting business for Deere’s customers.

AI can benefit farm sustainability and efficiency, and Deere is one of the easiest ways to invest in that trend.

Invest in AI in a way that’s right for you

From obvious plays like Nvidia to a well-known legacy brand like Deere, companies across industries are investing in AI to accelerate growth. Every industry is up for disruption. Some changes will happen gradually. Others could happen sooner than expected.

The key is investing in what you understand and with a long-term mindset. Companies that are boosting research and development and capital expenditures may not see a return on that investment for some time. Meanwhile, other hot stocks like Nvidia will eventually reach a cyclical slowdown that has nothing to do with the core investment thesis.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of March 25, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has the following options: long December 2026 $200 calls on Advanced Micro Devices. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Broadcom, Deere & Company , and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

If There Were a “Magnificent Seven” Purely for AI Stocks, These Would Be My Top Picks was originally published by The Motley Fool