The so-called “Magnificent Seven” refers to Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Google parent company Alphabet (GOOG) (GOOGL), Meta Platforms (META), and Tesla (TSLA). These companies are among the most influential in the world, both from a business and stock market perspective. As of the end of March, they collectively accounted for more than 32% of the S&P 500’s weight.

Earnings Growth Contains “Inflated” Elements

Goldman Sachs pointed out that although the overall earnings performance of S&P 500 components in the first quarter exceeded expectations, the investment gains of some large technology companies significantly boosted the aggregate data, and the real growth of corporate earnings may be “overestimated.” Goldman Sachs’ research team stated that the quarterly earnings growth of S&P 500 companies that have reported results was close to 25%, with investment gains from Amazon and Google contributing significantly, “distorting” the market’s judgment of corporate earnings to some extent. After excluding these related effects, the actual underlying earnings growth rate of S&P 500 companies is closer to 16%. Although this still indicates that the overall profitability of U.S. companies remains solid, it is significantly lower than the growth rate suggested by the surface data.

Meta Ranks Lowest in Valuation Among the “Magnificent Seven”

Recently, AI leaders such as Nvidia, Amazon, and Alphabet have continued to drive the rise of U.S. stocks, and the dominant role of large technology companies in the market has been strengthening. Because these stocks are generally sought after, it is often difficult to find genuine value among them, but Meta is sliding into the value zone. As of the close on May 4, its stock price had a forward price-to-earnings ratio of 19.8 times based on expected earnings over the next 12 months, the lowest valuation among the “Magnificent Seven.” However, just because a stock is cheap does not necessarily mean it is a good investment. Meta’s stock price has fallen nearly 6% this year. Is this due to poor business performance and weak prospects, or is the market undervaluing the company? From many perspectives, the latter possibility is more likely.

Advertising Business Remains Solid, AI Deployment Accelerates

Meta’s core business has always been advertising. In the first quarter, advertising revenue reached $55 billion, a year-over-year increase of 33%, accounting for nearly 98% of its total revenue. Ad impressions increased by 19%, and the average price per ad rose by 12%. This advertising “cash cow” allows Meta to invest in the metaverse, virtual reality headsets, and its current artificial intelligence projects. Although Meta does not have a large-scale cloud infrastructure platform like Amazon, Microsoft, and Alphabet, the release of its AI model Muse Spark last month shows that it should be taken more seriously in the AI field. Furthermore, Meta is collaborating with Broadcom to develop custom application-specific integrated circuits (ASICs) to gradually reduce its reliance on Nvidia and AMD and enhance its vertical integration capabilities.

Capital Expenditure Plans Raise Concerns

Although Meta’s first-quarter performance exceeded analysts’ expectations, its stock price remained under pressure, mainly due to its capital expenditure plan. Meta expects capital expenditures to be between $125 billion and $145 billion this year, with the majority used for building data centers and AI infrastructure, compared to a previous forecast of $115 billion to $135 billion. Due to past missteps such as Meta’s huge loss-making bets on the metaverse, investors are skeptical of its excessive spending. However, most of the other “Magnificent Seven” companies have similarly large-scale AI spending plans. Even with the increased budget, Meta’s projected capital expenditure remains below that of Amazon ($200 billion), Alphabet ($175 billion to $185 billion), and Microsoft ($190 billion). At current levels, the long-term upside potential of Meta’s stock is far greater than the downside risk.