It wasn’t too long ago that the investment community couldn’t get enough of FAANG stocks. Yeah, remember those?
But over the last couple of years, financial acronyms have reshuffled and now the apparent new favorites are the “Magnificent Seven” — a club that includes Microsoft, Alphabet, Amazon (NASDAQ: AMZN), Apple, Nvidia, Meta Platforms, and Tesla.
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I’m going to explore why I see Amazon as the runaway winner among Magnificent Seven stocks to buy over the next 10 years.
A pet peeve of mine is when a term or phrase becomes overused — or worse, referenced incorrectly (as deemed so by me). A good example of this in the financial lexicon is the word “ecosystem.” Corporate executives and business news pundits constantly refer to ecosystems when in fact the company in question hasn’t really built one.
A rare exception here, however, is Amazon. My bet is that you’re most familiar with its e-commerce market. But did you know the company also has businesses that span across cloud computing, advertising, streaming, logistics, groceries, and more?
This level of diversification gives it a huge advantage over its counterparts because the company has so many different levers it can pull, helping it adapt more effectively during various economic cycles. To me, the prospects presented by artificial intelligence (AI) will help Amazon’s already dense ecosystem blossom in new ways.
For example, its partnership with AI start-up Anthropic has already helped reignite some revenue and profit acceleration in the company’s cloud business. And as training and inferencing workloads become increasingly important for generative AI models, Amazon’s cloud computing infrastructure and its new semiconductor development should experience notable tailwinds.
Moreover, AI has the ability to transform its e-commerce storefront and streaming businesses in a material way through more personalized product and content recommendations. If the company can prove that its AI generates higher engagement with consumers, it’s reasonable to believe it could strengthen its relationships with online advertisers.
My overarching point here is that AI could support Amazon’s entire business, with AI-driven services being the core thread stitching the company’s broader fabric together.
One metric that I don’t give too much credence to is net income. While that metric can give you a glimpse into profitability trends, I prefer to look at adjusted measures such as free cash flow.
Given that free cash flow is net of material costs such as capital expenditures (capex), I find this financial metric a purer way to measure a company’s excess profit and liquidity.
|
Category |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Operating cash flow, trailing 12 months |
$71.6 billion |
$84.9 billion |
$99.1 billion |
$107.9 billion |
$112.7 billion |
|
Free cash flow, TTM |
$21.4 billion |
$36.8 billion |
$50.1 billion |
$52.9 billion |
$47.7 billion |
Data source: Amazon.
For the third quarter (ended Sept. 30), total revenue increased by 11% year over year. Sure, that level of revenue growth might give the appearance of a sluggish, mundane business, but trailing-12-month operating cash flow and free cash flow rose by 57% and 123%, respectively.
Simply put, Amazon is a massively efficient operation, financially speaking. And with AI looking to be the next big catalyst for the company, sales and profits could begin to enter a phase of accelerated compounding — providing even more financial flexibility to disrupt the competition.
As of the time of this writing, Amazon trades at a price-to-free-cash-flow multiple (P/FCF) of just 29.5, a significant discount to the company’s 10-year average P/FCF of roughly 82. Moreover, Magnificent Seven cohorts Microsoft and Alphabet (each of which also has an ecosystem) trade at a P/FCF multiple of 41.9 and 38.7, respectively.
Not only does Amazon trade at a material discount to its most direct competitors, but it also is historically cheap when benchmarked against its own prior valuations.
Given the company’s robust cash flow profile and my stance that AI will accelerate this growth, combined with a dirt cheap valuation, I think Amazon is the most compelling buy-and-hold choice among the Magnificent Seven for long-term investors. I see now as a great opportunity to buy shares at a reasonable price point.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
If I Could Buy Only 1 “Magnificent Seven” Stock Over the Next 10 Years, This Would Be It was originally published by The Motley Fool
Source: finance.yahoo.com