Amazon: The Standout Stock in the Magnificent Seven
Once upon a time, investors were obsessed with FAANG stocks, but recently the spotlight has shifted to a new set of companies known as the “Magnificent Seven.” This group features Microsoft, Alphabet, Amazon(NASDAQ: AMZN), Apple, Nvidia, Meta Platforms, and Tesla.
This article will explore why I believe Amazon stands out as the best investment choice among these tech giants for the next decade.
Amazon’s Thriving AI Ecosystem
One term that gets tossed around a lot in finance is “ecosystem.” Many companies claim they have one, but often it’s overstated. Amazon, however, truly represents a diverse business landscape. Most people know Amazon for its e-commerce, but the company also operates in cloud computing, advertising, streaming, logistics, and groceries.
This variety provides Amazon with a significant edge. It can respond to changing economic conditions better than many of its peers. Additionally, advancements in artificial intelligence (AI) offer even more opportunities for growth.
Amazon’s collaboration with AI startup Anthropic is already enhancing revenues in the cloud sector. As demand for AI-driven services increases, Amazon’s robust cloud infrastructure and new semiconductor innovations are set to benefit significantly.
AI also has the potential to improve Amazon’s e-commerce and streaming branches by offering tailored recommendations. If Amazon can demonstrate that its AI boosts consumer engagement, it could strengthen ties with online advertisers as well.
In essence, AI could enhance Amazon’s entire business structure, acting as a vital thread connecting its various offerings.
Image source: Getty Images.
Amazon’s Impressive Cash Flow
While net income is a popular measure for evaluating a company’s success, I focus more on free cash flow. This metric accounts for major expenses and offers a clearer picture of a company’s profitability 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.
In the recent third quarter, Amazon’s revenue jumped by 11% from the prior year. While some might view this as slow growth, the figures for trailing-12-month operating cash flow grew by 57%, and free cash flow skyrocketed by 123%.
This demonstrates that Amazon operates efficiently. With AI poised to drive future growth, the company may enter a phase of accelerated revenue and profits, allowing more flexibility to outpace competitors.
Amazon’s Valuation: A Bargain
Currently, Amazon’s stock trades at a price-to-free-cash-flow (P/FCF) ratio of 29.5, well below its 10-year average of about 82. In comparison, peers like Microsoft and Alphabet have P/FCF ratios of 41.9 and 38.7, respectively.
This valuation shows that, not only is Amazon cheaper compared to its rivals, it also presents a historical bargain when assessing its past valuations.
Given Amazon’s strong cash flow and the potential for AI to boost growth, I believe it is the top buy-and-hold option within the Magnificent Seven for long-term investors. The current stock price represents an excellent buying opportunity.
Is Now the Right Time to Invest $1,000 in Amazon?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on The Motley Fool’s board. Randi Zuckerberg, previous market development director at Facebook and sister to Meta CEO Mark Zuckerberg, is also a member of The Motley Fool’s board. Suzanne Frey, an executive at Alphabet, is a board member as well. Adam Spatacco holds shares in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has invested in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool advises on options such as long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views expressed here are solely those of the author and do not necessarily represent the views of Nasdaq, Inc.
