Ranking the "Magnificent Seven" From Most to Least Attractive, Based on Future Cash Flow

Although the artificial intelligence (AI) infrastructure build-out has been the stock market's leading catalyst over the last four years, no group of companies has played a bigger role in lifting Wall Street's major stock indexes to new heights than the "Magnificent Seven." The Magnificent Seven consists of:

• Apple (NASDAQ:AAPL)
• Nvidia (NASDAQ:NVDA)
• Microsoft (NASDAQ:MSFT)
• Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)
• Amazon (NASDAQ:AMZN)
• Meta Platforms (NASDAQ:META)
• Tesla (NASDAQ:TSLA)

While all seven of these trillion-dollar companies possess well-defined competitive advantages, their outlooks aren't identical. No metric does a better job of separating the bargains from the pretenders than cash flow.

Image source: Getty Images.

Cash flow is king when evaluating the Magnificent Seven

The traditional valuation go-to for investors is the time-tested price-to-earnings (P/E) ratio. While the P/E ratio works great for quickly evaluating mature businesses, it often comes up short for growth stocks, including the members of the Magnificent Seven.

By comparison, the Magnificent Seven companies often aggressively reinvest their operating cash flow back into higher-growth initiatives. This makes cash flow per share a far more telling valuation measure for these seven stock market leaders.

Based on Wall Street's cash-flow-per-share estimates for the following year, here's how the Magnificent Seven rank from most (i.e., cheapest) to least attractive:

1. Meta Platforms: 9.52 times estimated forward-year cash flow
2. Amazon: 10.45
3. Nvidia: 12.46
4. Alphabet: 13.09
5. Microsoft: 15.63
6. Apple: 29.06
7. Tesla: 74.63

On the one hand, cash flow exposes iPhone maker Apple and electric-vehicle kingpin Tesla as being priced for perfection. Neither is particularly attractive amid a historically pricey stock market.

But based on future cash flow growth, both Meta Platforms and Amazon stand out for all the right reasons.

Image source: Getty Images.

Meta and Amazon look to be surefire bargains among the Magnificent Seven

Despite short-lived concerns regarding Meta's sizable equity offering and its eye-popping AI capital expenditures (capex), Mark Zuckerberg's company is the most appealing from a valuation standpoint.

Although AI is (rightly) garnering all the attention on Wall Street, Meta's social media platforms have laid a seemingly unbreakable foundation for the company. Meta's family of apps, including Facebook, WhatsApp, and Instagram, attracted an average of 3.64 billion daily active users in September, leading to exceptional ad-pricing power.

But it's the integration of AI that can really supercharge Meta's growth prospects. In addition to integrating generative AI into its social media ad platforms, Meta recently launched its agentic AI personal assistant, Muse. Zuckerberg's company also plans to sell excess compute capacity to quickly recoup some of its sizable AI capex.

AI is also integral to Amazon's growth prospects. While most consumers are familiar with its dominance in online retail sales, they might not realize that Amazon Web Services (AWS) is the world's No. 1 cloud infrastructure services platform by total spend.

Since Amazon integrated generative AI and large language model capabilities into AWS, year-over-year sales growth for this substantially higher-margin segment has gone parabolic. AWS sales grew by 39% in the September-ended quarter, with AWS's run rate revenue reaching nearly $184 billion.

As Amazon's higher-margin operating segments (AWS, subscription services, and advertising services) become a larger share of net sales, its operating cash flow should soar.

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.