A Top Stock from the Magnificent Seven to Buy on the Dip

The earnings season is currently in full swing, and investors are eagerly keeping an eye on the performance of their favorite companies. Many businesses from the "Magnificent Seven," a group of dominant tech companies, are set to report their financial results soon.

These tech-driven companies are often on the radar of investors given their strong positions in their markets. However, the challenge is that these stocks typically come with high valuations.

Fortunately, this might be a great time to make a move. There's one stock from the Magnificent Seven that you should consider buying on the dip without any hesitation, and it's not Nvidia.

Wall Street Reactions

Alphabet Inc. (GOOGL) holds a massive market cap of $2.3 trillion and consistently attracts attention. Recently, when its shares fell by 7% following the release of its fourth-quarter financial update, it was clear that some in the analyst community were disappointed.

In the fourth quarter, Alphabet's revenue grew by 12% year over year to reach $96.5 billion. While this growth is commendable, the company fell short of expectations by around $90 million, which may have contributed to the stock's decline. Additionally, a larger-than-expected miss in the important Google Cloud sector might have fueled concerns among investors.

On a positive note, the company surpassed profit forecasts, with diluted earnings per share (EPS) soaring by 31% to $2.15 for Q4. This notable increase has been a trend, indicating Alphabet's impressive capability to efficiently scale its operations.

Another surprising factor for the market was the planned capital expenditures for 2025, which are projected to be $75 billion, significantly higher than the consensus estimate of $59 billion. Alphabet appears committed to investing in technology and infrastructure to bolster its growth.

According to CFO Anat Ashkenazi, "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 at the Bigger Picture

Investors can easily become fixated on quarterly results, but successful investing often requires a broader perspective. By stepping back, it's evident that Alphabet remains an outstanding business with significant growth potential.

Despite its large size, Alphabet still has room to expand. The global digital advertising market is predicted to reach $1.2 trillion in revenue by 2030, and Alphabet is well-positioned to capture a sizeable share thanks to its popular online properties.

Financial health is another strong point for Alphabet. In the fourth quarter alone, the company reported an impressive annualized free cash flow of $99 billion, even after considerable investment in growth initiatives. This cash flow allowed Alphabet to conduct $62.2 billion in share buybacks and pay out $7.4 billion in dividends over the past year.

Further, Alphabet's balance sheet is robust, showcasing a significant surplus of cash and marketable securities over long-term debt.

Seizing the Opportunity

Opportunities to acquire top-tier businesses at attractive prices don’t come by often. Currently, Alphabet's shares are trading about 10% below their peak and have a forward price-to-earnings ratio of 20.6, which is a discount compared to the overall S&P 500 index. This discount may not be justified given the company's prospects.

Analysts forecast that Alphabet's EPS will grow at a compound annual growth rate of 13.6% over the next three years. This positive forecast supports the argument for investing even at a below-market valuation multiple.

In conclusion, now is the time to take advantage of the current dip and consider purchasing this standout stock from the Magnificent Seven.

Please note that the author is associated with Alphabet, as they serve on the board of directors for The Motley Fool. Additionally, the author and their clients do not hold positions in any of the stocks mentioned. The Motley Fool does have investments in and recommends Alphabet.

investment, earnings, stocks