The Next Magnificent 7 Stock? 7 Growth Plays That Investors Shouldn’t Ignore
The Magnificent 7 Stocks have a long history of outperforming the market. The tech stocks in this cohort have exposure to multiple high-growth industries and are at the forefront of artificial intelligence (AI).
These corporations can adapt to various economic cycles and tap into growth opportunities quickly due to their cash reserves and systems. While the Magnificent 7 stocks can still generate positive returns over several years, some investors are setting their sights on the next group of leading stocks. Investors may want to consider some of these stocks when looking for equities that can become magnificent.
The Next Magnificent 7 Stocks: Adobe (ADBE)
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Adobe (NASDAQ:ADBE) has been a top performer in the stock market. Shares are up by 66% over the past year and have gained 141% over the past five years. The company’s stock buyback program scooped up 11.5 million shares and elevated the stock price.
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Adobe has invested in AI to boost retention rates and give customers more choices. Adobe Firefly can quickly generate stunning template designs and vector graphics. You can write some text into the generative AI and receive AI-generated images based on the search query.
Adobe’s remaining performance obligations and annual recurring revenue suggest the equity can go higher. The creative software company has over $15 billion in annual recurring revenue and achieved 12% year-over-year (YOY) revenue growth in Q4 FY23. Adobe also has $17.22 billion in remaining performance obligations compared to $19.41 billion in fiscal 2023 revenue.
Adobe’s net income expanded by 26.1% YOY. The company has net profit margins close to 30% and has a 53 P/E ratio. Adobe offers attractive growth prospects and potential for long-term investors.
Datadog (DDOG)
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Datadog (NASDAQ:DDOG) is a cloud infrastructure firm that helps corporations increase efficiency. The software breaks down silos between DevOps and Security teams to keep critical information safe from hackers.
Datadog has approximately 26,800 total customers. Over 3,100 of those customers pay more than $100,000 in annual recurring revenue. These customers represent 86% of Datadog’s total revenue. The firm is also growing its number of customers with annual recurring revenue that exceeds $1 million. The firm closed fiscal 2022 with 317 of these customers.
Datadog’s November 2023 Investor Presentation indicates that most customers use multiple products within the Datadog ecosystem. More than 80% of customers are using at least two products while almost half of the company’s customers use at least four products.
Datadog is a volatile stock but has performed well over the years. Shares are up by 61% over the past year and have gained 268% over the past five years.
The Next Magnificent 7 Stocks: Elf Beauty (ELF)
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Elf Beauty (NYSE:ELF) has been an under-the-radar beauty stock for several years. The equity has gained more than 1,750% over the past five years and is up by 141% over the past year.
Investors cheered on the stock’s impressive earnings report which featured revenue acceleration and more market share within the industry. Elf Beauty closed out Q3 FY24 with 85% YOY revenue growth and 40.8% YOY net income growth.
Elf Beauty raised its fiscal 2024 outlook in a meaningful way. The revenue midpoint between old and new guidance is a 9.3% improvement. The company is generating more sales than leadership had previously anticipated which is great for shareholders.
Elf Beauty currently trades at a 52-forward P/E ratio and offers double-digit net profit margins. The equity has the makings of a long-term winner, and the valuation is likely to smooth out for investors with multi-year time horizons.
Palo Alto Networks (PANW)
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Palo Alto Networks (NASDAQ:PANW) is a high-growth cybersecurity company that keeps many businesses safe from hackers. The rise of cyberattacks has increased the demand for Palo Alto Networks’ solutions.
The company opened the first quarter of fiscal 2024 with 20% YOY revenue growth. Net income surged by 871% YOY. Remaining performance obligations outpaced revenue growth and increased by 26% YOY. Rapid net income growth can strengthen the company’s valuation which currently sits at 69-forward P/E ratio.
Industrial trends suggest Palo Alto Networks can continue its rally. Ransomware attacks increased by 37% YOY and the average cost of ransomware payments is also going up. Thwarting cyber criminals before they infiltrate key data systems can save companies millions of dollars – and their reputations.
Palo Alto Networks posts data on its website that demonstrates the extent to which it protects businesses. The firm blocks approximately 329,640 malware executions per day and processes over 1 trillion IT processes. This high volume of activity is a result of the firm’s useful solutions and vast customer base.
The Next Magnificent 7 Stocks: Supermicro (SMCI)
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Although Nvidia (NASDAQ:NVDA) has captured more headlines, Supermicro (NASDAQ:SMCI) has outperformed the AI frontrunner year-to-date, over the past year, and over the past five years.
Supermicro’s 5-year returns exceed 4,000%, and there are several reasons to assume the equity is just getting started. Significant revenue and earnings growth have stirred optimism. Guidance suggests revenue will more than triple YOY.
The midpoint for the company’s diluted EPS guidance came in at $5.215. This figure represents a 241% YOY growth rate. Rapid net income and revenue growth suggest a low forward P/E ratio. Shares currently trade at a 52 P/E ratio which isn’t high for a company with Supermicro’s financial growth and runway.
Charles Liang, President and CEO of Supermicro, offered encouraging remarks that demonstrate high retention and soaring demand. “While we continue to win new partners, our current end customers continue to demand more of Supermicro’s optimized AI computer platforms and rack-scale Total IT Solutions,” he said.
Attracting new customers while generating more money from your existing customers is a winning business model.
Cloudflare (NET)
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Cloudflare (NYSE:NET) has built a vast platform with 13,000 networks that keep websites up and protect clients from cyberattacks. The company has over 189,000 paying customers who generate annual recurring revenue for the company. More than 60% of the company’s revenue comes from large customers. Q4 2023 featured a 35% YOY increase in that segment. The company closed the year with 2,756 large customers.
That wasn’t the only highlight from the fourth quarter of 2023. Cloudflare grew its revenue by 32% YOY while signing its largest new customer and its largest renewal contract. The company expects to generate $1.65 billion at the midpoint of its fiscal 2024 guidance. This midpoint suggests a 26.9% growth rate from the company’s $1.30 billion in fiscal 2023 revenue.
Matthew Prince, co-founder and CEO of Cloudflare, cited “robust momentum with large customers, significant progress in the public sector, and growth in Cloudflare One” as catalysts for Q4 results. These tailwinds should help the stock march higher.
Advanced Micro Devices (AMD)
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Advanced Micro Devices (NASDAQ:AMD) is a semiconductor firm that has outperformed the major indices. Shares are up by 112% over the past year and have gained 628% over the past five years.
Advanced Micro Devices is emerging from the other side of macroeconomic headwinds and should return to high growth shortly. The company demonstrated progress by reporting 10% YOY revenue growth in Q4 2023. That’s much better than the company’s 4% YOY revenue decline for all of 2023.
Advanced Micro Devices achieved $667 million in GAAP net income in that quarter. The net profit margin exceeded 10% and can expand as the company’s AI initiatives play out.
AMD has a vast portfolio of software and hardware solutions that make AI possible. It can help corporations use AI tools and generative AI to fuel more demand for their products. Artificial intelligence is in its early stages and has a large addressable market. AMD stands to benefit from AI tailwinds.
On this date of publication, Marc Guberti held long positions in ELF, SMCI, and NET. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Marc Guberti is a finance freelance writer at InvestorPlace.com who hosts the Breakthrough Success Podcast. He has contributed to several publications, including the U.S. News & World Report, Benzinga, and Joy Wallet.
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