Ranking the "Magnificent Seven" From Most to Least Attractive, Based on Future Cash Flow
Key Points
With artificial intelligence (AI) as the primary tailwind, the Magnificent Seven have lifted Wall Street's major stock indexes to new heights.
Since all members of the Magnificent Seven are aggressively reinvesting their cash flow into high-growth initiatives, cash flow serves as the best measure of value.
Two companies benefiting from the early integration of generative AI are the clearest values within the Magnificent Seven.
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Since early June, Wall Street's major stock indexes have all rallied to fresh record highs. While artificial intelligence (AI) is the trend behind this surge in stock valuations, it's the "Magnificent Seven" that have done most of the heavy lifting. The Magnificent Seven is composed of:
- 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 are some of Wall Street's most influential businesses, and they're all, to some degree or another, dependent on the AI revolution for their future growth prospects. They're also companies with markedly different outlooks, based on their operating cash flow.
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Image source: Getty Images.
Ranking the Magnificent Seven according to their forward-year cash flow
While the time-tested price-to-earnings ratio is the safety blanket for investors when quickly evaluating mature businesses, it doesn't do justice to growth stocks (i.e., the Magnificent Seven). Given that these companies aggressively reinvest their cash flow into high-growth initiatives, future cash flow serves as a far better measure of value.
According to Wall Street's consensus cash-flow-per-share estimates for next year, here's how the Magnificent Seven rank from most (i.e., cheapest) to least attractive (as of July 23):
- Meta Platforms: 9.44 times estimated forward-year cash flow
- Amazon: 10.36
- Microsoft: 13.04
- Alphabet: 14.87
- Nvidia: 15.79
- Apple: 28.82
- Tesla: 64.71
Based on future cash flow, neither electric-vehicle maker Tesla nor iPhone titan Apple are particularly attractive. On the other hand, Meta and Amazon stand out for all the right reasons amid a historically expensive stock market.
Image source: Amazon.
Meta and Amazon are screaming bargains amid a pricey stock market
Meta Platforms is the cheapest Magnificent Seven stock, which likely reflects the immediate benefits it's recognized by integrating generative AI into its social media advertising platforms. Companies having the ability to tailor static or video messages to users are improving click-through rates and enhancing Meta's already stellar ad pricing power.
Meta's predominantly ad-driven sales are also intricately tied to the health of the U.S. economy, which spends a disproportionate amount of time expanding. Advertising might not be a game-changing operating model, but businesses have demonstrated a willingness to pay a premium for Meta's services.
Meanwhile, Amazon's ancillary segments have become its shining star. Though its dominant online marketplace still accounts for a majority of its revenue, cloud infrastructure services platform Amazon Web Services (AWS) generates the bulk of its operating income.
Since AWS integrated generative AI and large language model solutions into its platform, sales growth for this considerably higher-margin operating segment has reaccelerated. When coupled with excellent subscription pricing power with Prime and sustained double-digit advertising sales growth, it's easy to see why Wall Street analysts expect Amazon's full-year operating cash flow to more than double between 2025 and 2028.
Although bargains are few and far between at the moment, Meta and Amazon fit the bill.
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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.
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