Why Are Meta Platforms, Microsoft, and Nvidia Outperforming the "Magnificent Seven" and the S&P 500?

Meta Platforms (META 1. 04%), Microsoft (MSFT -0. 28%), and Nvidia (NVDA 1. 74%) are knocking on the door of all-time highs, whereas the other four "Magnificent Seven" stocks -- Amazon, Alphabet, Tesla, and Apple -- are down year to date

Here's why artificial intelligence (AI) monetization is a key differentiating factor that separates Meta, Microsoft, and Nvidia from the rest of the pack -- and why all three growth stocks could still have further room to run

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The AI difference Meta, Microsoft, and Nvidia benefit from AI in a variety of ways

META data by YCharts Meta uses AI to imve its algorithm, keeping users engaged and connecting advertisers with potential buyers

The longer users stay on Meta's Family of Apps (Instagram, Facebook, WhatsApp, and Threads), the more attractive those platforms become for advertisers

Meta is expanding its AI investments by pouring capital expenditures into other AI endeavors, the Meta AI App

Launched on April 29, the app is built with the version of Meta's large language model, Llama 4

The app offers a personalized AI experience designed around voice conversation

AI presents arguably the most impactful duct upgrade in years for Microsoft's legacy software suite and Intelligent Cloud platform

Nvidia makes graphics cessing units (GPUs), which are the workhorses that power data centers

More computing power will be needed to support growing AI adoption and the increasing complexity of AI models

Nvidia is the undisputed leader in viding a full stack of AI computing solutions that includes hardware (GPUs), software, and other cloud-based solutions

Meanwhile, Nvidia AI software tools CUDA and TensorRT help developers use Nvidia GPUs for everything from general-purpose computing tasks to training deep learning models

Runway for future earnings growth The market hates uncertainty, but it also loves companies with a vision for growing revenue and converting capital expenditures into free cash flow

Meta, Microsoft, and Nvidia all have multiple ways to grow earnings

Meta has steadily increased its advertising revenue and fitability over time, largely thanks to Instagram's innovations in short-form s through Reels

Regardless of the success of the Meta AI app or Meta's other jects in augmented and virtual reality ( Meta Quest), the company could still generate solid growth from its Family of Apps alone

Microsoft is in a similar boat

It benefits from AI, but it isn't a pure-play AI company

Microsoft generates a ton of cash that it can funnel directly into long-term growth jects, while still having plenty of dry powder to manage its operating expenses and return cash to holders through buybacks and dividends

Nvidia has transformed its from relying largely on gaming, fessional visualization, cryptocurrency, and other end to being a majority of data center-focused

This concentration makes Nvidia more of a pure-play AI name than Meta and Microsoft, which comes with higher risk and higher potential reward

What's more, Nvidia's sky-high operating margins have helped the company convert a substantial amount of revenue into fit

But competition or a slowdown in AI spending may lead to margin erosion over time

Even if that happens, the company could still grow earnings at a steady rate -- just not at the pace investors have grown accustomed to in recent years

TSLA PE Ratio (Forward) data by YCharts Except for Tesla on the high end and Alphabet on the low end, most of the Magnificent Seven have forward price-to-earnings ratios in the mid-20s to the mid-30s

This is far from value territory, but it is also not expensive, given how far these stocks have climbed in recent years

As mentioned, Meta, Microsoft, and Nvidia's high margins are a big reason to be optimistic their future earnings growth

And, to no surprise, these three companies have the highest fit margins of the Magnificent Seven

That level of fitability is almost unheard of, especially for a majority hardware company

It also vides a cushion by which Nvidia's margins could come down and it would still be a phenomenal

Granted, it's important to note that fit margin is not an apples-to-apples comparison

Amazon's fit margin looks low because of its high-volume but low-margin e-commerce

Amazon Web Services makes up a fraction of Amazon's total sales, but it contributes the majority of its operating income because it is such a high-margin segment

Similarly, Tesla's primary is manufacturing cars -- a traditionally low-margin

However, these stocks are not cheap

A growth slowdown could make any of these stocks appear more expensive in the near term

So it's best to only apach these names if you have at least a three- to five-year investment time horizon

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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

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

Daniel Foelber has positions in Nvidia

The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla

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