It wasn’t long ago that the investment community couldn’t get enough of FAANG stocks. Yes, do you remember that one?
But over the past few years the financial acronyms have been reshuffled and now the apparent new favorites are the ‘Magnificent Seven’ – a club that also includes Microsoft, Alphabet, Amazon (NASDAQ: AMZN), Apple, Nvidia, MetaplatformsAnd Tesla.
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I’m going to explore why I see Amazon as the runaway winner among the Magnificent Seven stocks to buy over the next decade.
A pet peeve of mine is when a term or phrase is overused – or worse, incorrectly referred to (as I find it). A good example of this in the financial lexicon is the word ‘ecosystem’. Business leaders and business news experts constantly refer to ecosystems, when in fact the company in question hasn’t actually built one.
A rare exception to this, however, is Amazon. I bet you are most familiar with the e-commerce market. But did you know that the company also has businesses in cloud computing, advertising, streaming, logistics, groceries and more?
This level of diversification gives it a huge advantage over its peers because the company has so many different levers it can pull, allowing it to adapt more effectively during different economic cycles. To me, the prospects of artificial intelligence (AI) will help Amazon’s already dense ecosystem thrive in new ways.
For example, the collaboration with AI startup Anthropic has already ensured that sales and profits in the company’s cloud activities have increased again. And as training and workload inference become increasingly important for generative AI models, Amazon’s cloud computing infrastructure and new semiconductor development should see notable tailwinds.
Furthermore, AI has the ability to materially transform its e-commerce stores and streaming businesses through more personalized product and content recommendations. If the company can prove that its AI generates greater engagement with consumers, it’s reasonable to believe it can strengthen its relationships with online advertisers.
My overarching point here is that AI could underpin Amazon’s entire business, with AI-driven services at the core of the broader fabric of the business.
One metric I don’t put too much faith in is net income. While this metric can give you a glimpse into profitability trends, I prefer to look at custom measures like free cash flow.
Given that free cash flow excludes material costs such as capital expenditures (capex), I find this financial metric to be a cleaner way to measure a company’s excess profits and liquidity.
|
Category |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Operational cash flow, twelve months behind us |
$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 September 30), total revenue increased 11% year-over-year. Sure, that level of revenue growth might give the appearance of a slow, run-of-the-mill business, but operating cash flow and free cash flow over the last twelve months were up 57% and 123%, respectively.
Simply put, Amazon is a tremendously efficient company financially. And with AI looking set to become the next big enabler for the business, revenue and profits could enter a phase of accelerated growth, providing even more financial flexibility to disrupt the competition.
As of this writing, Amazon is trading 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 around 82 In addition: Beautiful 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.
Amazon not only trades at a significant discount to its closest competitors, but is also historically cheap when compared to its own past valuations.
Given the company’s robust cash flow profile and my view that AI will accelerate this growth, combined with a dirt-cheap valuation, I think Amazon is the most attractive buy-and-hold choice among the Magnificent Seven for long-term investors. I now see this as a great opportunity to buy shares at a reasonable price.
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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, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director 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 holds 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 to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
If I could buy just one ‘Magnificent Seven’ stock in the next decade, this would be it, originally published by The Motley Fool
