In the world of stocks, the “Magnificent Seven” group has been making waves in recent years. Comprising some of the largest companies globally, these market leaders have been driving the markets higher and are expected to maintain their leadership positions going forward. Among the seven, three stocks stand out as solid buys at present: Amazon, Alphabet, and Meta Platforms. Investors would be wise to closely examine this trio.
When evaluating this group, it is crucial to strike a balance between growth and stock valuations. Nvidia emerges as the fastest-growing company in the cohort, thanks to the ongoing artificial intelligence (AI) arms race. However, it also happens to be one of the most expensive stocks. On the other hand, Alphabet and Meta Platforms stand out as the cheapest options based on their forward price-to-earnings (P/E) ratios.
Contrary to assumptions based on their lower valuations, Alphabet and Meta Platforms are not lagging behind in terms of growth. Both companies fall in the middle of the pack when it comes to revenue growth, and they rank near the top in terms of earnings per share (EPS). This combination of lower stock prices, coupled with faster revenue and earnings growth, makes them attractive investment opportunities.
Historically, Alphabet and Meta Platforms have traded at a discount due to their heavy reliance on advertising revenue. In the third quarter, 75% of Alphabet’s revenue and a staggering 98% of Meta’s revenue came from advertising. Given the cyclical nature of the advertising business, investors have been cautious, anticipating an eventual downturn. However, this should not deter potential investors. Moreover, considering that the broader market, as measured by the S&P 500, trades at a higher forward earnings multiple (24.6 times) compared to Alphabet (22.3) and Meta (25.7), these two stocks represent compelling value propositions.
Both Alphabet and Meta Platforms are currently performing well. Alphabet’s revenue and EPS have risen by 15% and 37%, respectively. Meta Platforms, on the other hand, has experienced a revenue increase of 19% and a 37% rise in earnings. Additionally, both companies have made investments in AI, although these ventures still constitute a relatively small part of their overall business.
While Amazon may not be as cheap as Alphabet and Meta Platforms, trading at 41.9 times forward earnings, there are logical reasons behind its higher valuation. Amazon has been steadily improving its operating margins, thanks to CEO Andy Jassy’s focus on streamlining operations and shedding unprofitable business segments. Additionally, higher-margin segments like advertising and third-party seller services have outpaced Amazon’s lower-margin businesses, contributing to margin expansion. Furthermore, Amazon Web Services (AWS), which accounts for 17% of sales but 60% of operating profits, has witnessed a resurgence in revenue due to AI demand. This growth trajectory is expected to continue, further bolstering Amazon’s profitability.
With Amazon’s high-margin segments outpacing its lower-margin ones, the company’s profits are projected to rise at a faster pace than its revenue. This trend was evident in Q3, where Amazon’s net sales increased by 11%, while its earnings per share surged by 52%. Such performance justifies Amazon’s relatively expensive stock price and positions it as a top stock to consider within the “Magnificent Seven” group.