These AI stocks could be part of a new Magnificent 7
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As five of the Magnificent 7 report earnings this week, investors are looking for fresh ways to play the AI boom beyond those overbought Big Tech stocks.
Why it matters: Wall Street's shift of attention away from the Mag 7 is throwing a spotlight on three AI companies: Oracle, Broadcom and Palantir.
What they're saying: Those companies came up in calls with over half a dozen strategists about potential Mag 7 candidates.
- "The AI story is fully priced into Nvidia, but it's not priced into Broadcom," says Jay Goldberg, senior analyst at Seaport.
- Oracle is "emerging as a key competitor in the cloud business," says Joe Tigay, portfolio manager of the Rational Equity Armor Fund.
- Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, says she's buying Palantir because of the CEO's vision.
- And Nvidia could face competition as Qualcomm yesterday announced new data center chips, pushing its stock up as much as 20%.
Zoom in: The broad bull case for all these stocks? They could all eat the lunch of the existing Mag 7 members.
- Oracle's recent deal with OpenAI puts it in direct competition with cloud giants Microsoft, Amazon and Google, Tigay notes.
- Broadcom builds custom chips for large customers. And while Nvidia's chips are considered the dominant player in the industry based on performance, Broadcom could catch up.
- Palantir will grow into its high valuation, says Dan Ives, managing director at Wedbush, adding that its AI is "disrupting the software landscape like an earthquake."
Zoom out: Tengler is trimming her exposure to Oracle and Broadcom because she was so early to both names that following their recent rallies to record, they made up too hefty a chunk of her ETF.
- She's eyeing IBM as the next Oracle, given that the company has 47% of the disclosed quantum computing deals.
Yes, but: If a major concern with the Magnificent 7 stocks is that they're expensive, then so are the three contenders.
- Oracle has a price-to-earnings ratio of 65 while Broadcom's P/E ratio is nearly 92.
- For context, Nvidia's P/E ratio is just over 54.
- Still, if the market has taught us anything this year, it's that stocks can have long rallies ahead even if they're already expensive.
The bottom line: The Mag 7 isn't dead just yet.
- "It's widening out," Tigay says. "I would say those seven companies are still magnificent...there's nothing wrong with those companies."
- Nonetheless, investors are looking for new names where the AI growth story isn't already priced in.
