Ranking the "Magnificent Seven" From Most to Least Attractive, Based on Projected Cash Flow
Key Points
With artificial intelligence (AI) as the primary catalyst, the Magnificent Seven have boosted the stock market to new highs.
Since the traditional price-to-earnings ratio struggles with high-growth stocks, cash flow serves as the best metric for evaluating members of the Magnificent Seven.
Two Magnificent Seven stocks with undeniable AI ambitions are clear-cut bargains.
Since early August, all three of Wall Street's major stock indexes have catapulted to record highs. Although artificial intelligence (AI) has been the clear catalyst behind this move, it's the "Magnificent Seven" that have lifted the stock market to new heights. The Magnificent Seven consists of (in descending market cap):
- Nvidia (NASDAQ:NVDA)
- Apple (NASDAQ:AAPL)
- Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)
- Microsoft (NASDAQ:MSFT)
- Amazon (NASDAQ:AMZN)
- Meta Platforms (NASDAQ:META)
- Tesla (NASDAQ:TSLA)
These trillion-dollar businesses are leaders within their respective industries, but this doesn't mean they're all worth buying. While there's a laundry list of ways to value stocks, arguably none work better for the Magnificent Seven than projected cash flow.
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Ranking the Magnificent Seven by their projected cash flow
The price-to-earnings (P/E) ratio is the go-to for most investors when quickly evaluating a public company. While the traditional P/E ratio works great for mature businesses, it struggles to tell the full story for high-growth stocks.
More importantly, all of the Magnificent Seven companies reinvest a substantial percentage of their cash flow into high-growth initiatives. This makes cash flow and projected cash flow, not the P/E ratio, the best measure to determine if a Magnificent Seven stock is a bargain or bloated.
According to Wall Street's consensus cash-flow-per-share estimates for 2027, as of Sept. 25, here's how the Magnificent Seven rank from most (i.e., cheapest) to least (i.e., priciest) attractive:
- Amazon: 10.91 times estimated forward-year cash flow
- Meta Platforms: 11.84
- Microsoft: 15.39
- Nvidia: 15.6
- Alphabet: 16.11
- Apple: 30.48
- Tesla: 80.2
Based solely on cash flow, Elon Musk's Tesla and iPhone maker Apple are the antithesis of a bargain. By comparison, dual-industry leader Amazon and social media titan Meta Platforms stand out as genuine bargains amid the second-priciest stock market in history.
Image source: Getty Images.
Amazon and Meta remain attractive amid a historically pricey stock market
For the first time in several months, Amazon has leapfrogged Mark Zuckerberg's Meta to become the most attractive Magnificent Seven stock by future cash flow. Whereas Amazon closed out every year of the 2010s at 23 to 37 times its reported cash flow, shares can now be purchased for less than 11 times next year's projected cash flow.
Amazon is a beast on two fronts. While most investors know it's the kingpin of e-commerce, they might not realize that Amazon Web Services (AWS) is also the global No. 1 cloud infrastructure services platform by total spend. Since Amazon integrated generative AI and large language model solutions into AWS, sales growth for this segment has reaccelerated.
What's more, AWS is a considerably higher-margin operating segment than online retail sales. As it grows into a larger piece of the pie, Amazon's cash flow can grow at a much faster pace than sales.
Meanwhile, Meta's shares have surged following the early September release of its Muse personal AI assistant. Wall Street has been wondering how Meta would capitalize on its aggressive AI spending, and Muse offers a small taste of that.
But don't overlook Meta's foundational social media platforms. Lost amid the AI hype is the 3.6 billion daily active people Meta's family of apps attracted, on average, in June. No other social media platforms come close to this figure, providing Zuckerberg's company with impressive ad-pricing power.
Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.