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Statistically, These 2 "Magnificent Seven" Stocks Are Genius Buys, Based on a Time-Tested Valuation Metric
Wall Street’s bull market has proved resilient for more than three years. While prevailing themes, such as the rise of artificial intelligence (AI) and the advent of quantum computing, have provided a notable lift for equities, it’s the “Magnificent Seven” that have put Wall Street on its proverbial back and lifted the broader market to new heights.
All members of the Magnificent Seven – Nvidia (NVDA 2.13%), Apple (AAPL 1.62%), Alphabet (GOOGL 2.30%)(GOOG 2.45%), Microsoft (MSFT 2.51%), Amazon (AMZN 3.89%), **Meta Platforms **(META 3.91%), and Tesla (TSLA 2.70%) – possess sustainable moats or well-defined competitive advantages. But these trillion-dollar stocks aren’t created equally.
Image source: Getty Images.
The price-to-cash-flow ratio differentiates the bargains from the pretenders
Considering that Wall Street’s most influential companies are aggressively reinvesting in themselves, the time-tested price-to-cash-flow ratio makes for a smarter way to value these top-tier businesses than the traditional price-to-earnings ratio.
As of the closing bell on March 24, here are the forward-year price-to-cash-flow ratios for all members of the Magnificent Seven:
With the understanding that cash flow forecasts can and do vary from one quarter to the next, electric-vehicle maker Tesla and iPhone maker Apple stand out for the wrong reasons. Meanwhile, compelling arguments can be made that the valuations of Nvidia, Alphabet, and Microsoft lie between fairly valued and modestly attractive.
However, the time-tested price-to-cash-flow ratio makes it crystal clear that social media colossus Meta Platforms and dual-industry leader Amazon are the best deals within the Magnificent Seven.
Image source: Getty Images.
Meta and Amazon are historically cheap
While investors are laser-focused on AI, they often overlook how powerful Meta’s social media assets have become. In December, Meta attracted an average of 3.58 billion daily users to its family of apps, including Facebook, WhatsApp, Instagram, Threads, and Facebook Messenger. Since no other social media platform comes close to this figure, Meta is able to charge a premium for ad placement.
But artificial intelligence is also playing a role in Meta’s top-notch advertising operations. Although a small fortune is being spent on Meta’s AI Superintelligence Lab, it’s the incorporation of generative AI solutions into the company’s advertising platform that’s paying immediate dividends. Tailoring ads for individual users can improve click-through rates and further enhance its ad pricing power.
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NASDAQ: META
Meta Platforms
Today’s Change
(-3.91%) $-21.40
Current Price
$526.14
Key Data Points
Market Cap
$1.3T
Day’s Range
$520.27 - $543.59
52wk Range
$479.80 - $796.25
Volume
2.2M
Avg Vol
15M
Gross Margin
82.00%
Dividend Yield
0.40%
Meanwhile, Amazon’s cash flow growth has come almost entirely from its ancillary operating segments, with Amazon Web Services (AWS) leading the charge. AWS is the world’s No. 1 cloud infrastructure services platform by total spend. Incorporating generative AI and large language model capabilities into AWS has reaccelerated its growth rate.
Additionally, Amazon has maintained double-digit sales growth from its subscription service segment (Prime) and its advertising services. Having the most-popular online marketplace and a growing content library has made it a go-to destination for advertisers.
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NASDAQ: AMZN
Amazon
Today’s Change
(-3.89%) $-8.07
Current Price
$199.47
Key Data Points
Market Cap
$2.1T
Day’s Range
$199.14 - $206.62
52wk Range
$161.38 - $258.60
Volume
2.6M
Avg Vol
50M
Gross Margin
50.29%
Based on their respective forward-year cash flow estimates, Meta Platforms is valued at a 34% discount to its average multiple to cash flow over the trailing five-year period. As for Amazon, its cash flow multiple for 2027 would represent a 48% discount compared to the last half-decade. Both appear to be phenomenal bargains amid a historically pricey stock market.