Fears of a recession resurfaced last week when a disappointing jobs report raised questions about whether the Federal Reserve waited too long to cut interest rates. That struck the Nasdaq Composite (NASDAQINDEX: ^IXIC) in correction territory, meaning the technology index has fallen at least 10% from its record high.
Shares of the “Magnificent Seven” have lost double digits, though some have been hit harder than others. Amazon (NASDAQ: AMZN) fell 20% from its peak, while Apple (NASDAQ: AAPL) is down only 11%. Investors may be tempted to buy the dip in either case, but not every pullback is a buying opportunity.
Amazon stock is currently trading at a reasonable valuation, but Apple stock still looks expensive. Here are the key details.
Amazon: The Magnificent Seven Stocks Are Worth Buying Now
Amazon has a strong presence in three major markets. It runs the most popular e-commerce marketplace, measured by monthly visitors. It is the third-largest advertising company in the U.S., and eMarketer says Amazon could become the second largest Meta platforms by the end of the decade. Finally, Amazon Web Services is a leader in cloud infrastructure and platform services, meaning it is ideally positioned to monetize artificial intelligence (AI).
Amazon reported mixed financial results in the second quarter. Revenue rose 10% to $148 billion, missing Wall Street’s forecast of $148.6 billion. But net income under generally accepted accounting principles (GAAP) rose 94% to $1.26 per share, beating the $1.03 per share analysts had expected.
Unfortunately, management also issued a somewhat disappointing forecast. The company expects operating profit to rise 18% in the third quarter, while analysts were expecting 37% growth. That shortfall contributed to the stock’s recent decline, but it creates an opportunity for patient investors.
Amazon still has strong growth prospects in e-commerce, digital advertising and cloud computing. According to eMarketer, retail e-commerce sales and digital ad spending are expected to grow 8% and 10% annually, respectively, through 2027. Meanwhile, public cloud revenue is forecast to grow 19% annually through 2028, according to IDC. That gives Amazon a good shot at double-digit revenue growth in the coming years, which should translate into slightly faster profit growth as the company continues to optimize operating costs.
Wall Street does indeed expect earnings per share to grow 23% annually through 2027. That makes the current valuation of 38.5x earnings reasonable. I say that because that number yields a PEG ratio of 1.7, a significant discount from the three-year average of 2.9. Patient investors should feel confident buying a small position in Amazon today.
Apple: Magnificent Seven stock is now better avoided
Apple divides its business into two revenue streams: products and services. The former includes revenue from consumer electronics like the iPhone, iPads and Mac computers, while the latter includes revenue from the App Store, Apple Pay, iCloud and subscription offerings like Apple TV+ and Apple Music. The company has a strong presence in several of those markets.
Apple consistently ranks second and fourth in quarterly shipments of smartphones and personal computers (PCs). The company operates the leading mobile app store, measured by sales, and has parlayed that leadership into a thriving advertising business.
Additionally, Apple Pay is the leading in-store mobile wallet among US consumers, and Apple TV+ recently overtook Apple Pay. Paramount WorldwideParamount+ Ranked Sixth Most Popular Streaming Service in the US
Still, Apple is facing headwinds. The recently passed Digital Markets Act could hurt the dominance of its App Store in Europe by forcing the company to support third-party app stores. What’s more, Apple is losing smartphone market share to local competitors in China. Regional iPhone shipments fell 3% in the second quarter, despite an acceleration in the broader market. That’s a concern, given that China accounted for 19% of Apple’s revenue last year.
Finally, Apple lacks a clear strategy when it comes to AI. The company plans to introduce Apple Intelligence in October, bringing AI features to iPhones and MacBooks. But those features will be free and, aside from potentially incentivizing product upgrades, management has yet to lay out detailed plans for future monetization. Bloomberg has speculated that Apple will eventually charge for certain AI features, but whether consumers will pay is another question.
Apple reported modest financial results in the June quarter. Revenue rose 4.8% to $85.8 billion, and GAAP net income rose 7.6% to $21.4 billion. Active devices reached a record high across all products and geographic segments, services revenue rose 14% to a record $24.2 billion, and gross margin expanded 180 basis points. In short, Apple is successfully attracting consumers to its hardware ecosystem and monetizing them with high-margin services.
The problem is valuation. Apple shares currently trade at 31.8 times earnings, a premium over the three-year average of 27.8 times earnings. That price tag seems particularly steep considering Wall Street expects Apple to grow earnings per share by 9% per year over the next three years.
That high valuation could explain why Warren Buffett has drastically cut his stock prices. Berkshire Hathaway‘s stake in Apple in recent quarters. Investors should avoid this stock now.
Should You Invest $1,000 in Amazon Now?
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Randi Zuckerberg, former chief marketer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions with Amazon. The Motley Fool has positions with and recommends Amazon, Apple, Berkshire Hathaway and Meta Platforms. The Motley Fool has a disclosure policy.
Nasdaq Market Correction: 1 “Magnificent Seven” Stock to Buy Now, and Another to Avoid was originally published by The Motley Fool
