Although it’s hard to argue that most of the “Magnificent Seven” stocks would be bad long term investments, there are two in particular that I would like to buy right now. Amazon.com (NASDAQ: AMZN) is trading at just 2% below all-time highs, but profitability is still in relatively early stages.
The other is Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), the parent company of Google. Alphabet just hit a new all-time high as of this writing (on May 16), and its recent results have given investors a lot to smile about.
Here’s a look at why I’d buy them both now (I already have Amazon), despite strong recent performance.
Amazon’s business has been impressive lately
Amazon is a company that doesn’t need much introduction, with a dominant share of the US e-commerce market and the leading cloud services sector (AWS). Long-term investors have been richly rewarded for their patience, but the company could still have plenty of room to grow on both sides.
On the e-commerce side of the business, Amazon.com is the clear leader, with a larger e-commerce market share in the United States than the next ten competitors combined. But e-commerce currently represents only about 15% of U.S. retail sales, and even lower percentages in some of the other markets where the company operates. And while Amazon Web Services (AWS) is the leader in cloud services, the global cloud computing market will be approximately $500 billion by 2023 but is expected to grow to five times that level in 2032.
Not only does Amazon still have a lot of growth potential, but CEO Andy Jassy’s plans to improve efficiency are starting to pay off. In the most recent quarter, Amazon’s operating profit rose by a large margin tripled year after year, thanks to particularly strong growth in AWS and ad revenue, both of which are high-margin businesses.
An absolute cash machine with room to grow
Unlike Amazon, Alphabet is already a hugely profitable company. Its main subsidiary, Google, owns some of the most dominant platforms and applications in the world, including the massive Google Search business, YouTube, Gmail, Chrome, Android, and many more. It also has the Google Cloud business, which is a direct competitor to AWS.
While some of Google’s businesses are quite mature, there is still a lot of room to optimize its advertising business, which is the main way its non-cloud businesses make most of their money. And we’ve already mentioned the enormous growth potential of cloud services over the next decade.
One thing to realize is that all of Google’s businesses have incredible margins. Over the past four quarters, Alphabet has achieved a turnover of 26% net margin. In 2023, Alphabet generated net income of nearly $74 billion, and the company has about $108 billion in cash and short-term investments on its balance sheet. So not only does the company have enough financial flexibility to take advantage of opportunities, it’s also returning tons of capital to shareholders through buybacks and just paid its first-ever dividend.
An all-time high does not mean the same as ‘expensive’
To be fair, these are not cheap stocks. Alphabet trades for roughly 30 times forward earnings estimates, and Amazon’s price-to-earnings ratio is significantly higher. Combined, they have a market capitalization of more than $4 trillion.
However, an important concept for investors to know is that a high price does not necessarily mean a stock is expensive. These are two proven winners with a lot of future growth potential, and I wouldn’t be surprised if both delivered market-beating returns in the coming years.
Should You Invest $1,000 in Amazon Now?
Before you buy stock in Amazon, consider this:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $578,143!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
Suzanne Frey, a director at Alphabet, 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. Matt Frankel has positions at Amazon. The Motley Fool holds positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
2 “Magnificent Seven” Stocks at Record Levels I’d Buy Right Now was originally published by The Motley Fool
