If Given the Chance to Invest in Just One "Magnificent Seven" Stock for the Next Decade, This Would Be My Choice
If Given the Chance to Invest in Just One "Magnificent Seven" Stock for the Next Decade, This Would Be My Choice
A while back, the investment world was can't-get-enough-of type of obsessed with FAANG stocks. Remember those?
But lately, financial abbreviations have shuffled, and now, it's the "Magnificent Seven" that have taken center stage – a group comprising Microsoft, Alphabet, Amazon (-1.45%), Apple, Nvidia, Meta Platforms, and Tesla.
I'm about to explain why I believe Amazon is going to reign supreme as the standout pick from the Magnificent Seven stocks to invest in over the next decade.
An artificial intelligence (AI) environment worthy of attention
There's one pet peeve of mine that just drives me up the wall – when overused terms or phrases are misused or misrepresented in the financial world. A perfect example is the term "ecosystem." Financial executives and business analysts are constantly throwing the term around, but in many cases, the companies they refer to haven't actually built an ecosystem yet.
Amazon, on the other hand, is the exception to the rule. You're probably most familiar with its online retail business, but did you know it has a range of other ventures, including cloud computing, advertising, streaming, logistics, grocery delivery, and more?
This level of diversification gives Amazon a significant advantage over its competitors because it has so many different ways to adapt and stay afloat during various economic cycles. Plus, the potential of AI to improve their existing ventures and, in some cases, create brand-new ones, could explode Amazon's already-impressive ecosystem even further.
Operating cash flow, trailing 12 months
For example, its partnership with AI startup Anthropic has helped revitalize its cloud business and generate more revenue. And as training and inferencing workloads become more critical for generative AI models, Amazon's cloud computing infrastructure and new semiconductor development should also see notable growth.
$71.6 billion
AI can also enhance Amazon's e-commerce storefront and streaming services by providing more personalized product and content recommendations, which could lead to stronger connections with online advertisers.
$84.9 billion
My main point here is that AI has the potential to support Amazon's entire business, with AI-driven services playing a pivotal role in the company's broader fabric.
$99.1 billion
Amazon's capital reserves are just crazy
$107.9 billion
I'm not big on net income as a metric, but I do pay close attention to free cash flow. This financial metric, which takes into account capital expenditures and other material costs, is a much more accurate reflection of a company's excess profits and liquidity.
$112.7 billion
As you can see in the table below, Amazon's free cash flow has been growing at a steady pace:
| Quarter | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 || --- | --- | --- | --- | --- | --- || Free cash flow, Trailing-12-months | $21.4 billion | $36.8 billion | $50.1 billion | $52.9 billion | $47.7 billion |
Free cash flow, TTM
While its revenue growth might not look particularly impressive at first glance, its operating cash flow and free cash flow have both seen significant increases.
$21.4 billion
Simply put, Amazon is a highly efficient company, financially speaking. And with AI poised to be the next big catalyst for the company, sales and profits could enter a phase of exponential growth, giving Amazon even more financial flexibility to outpace its competitors.
$36.8 billion
Amazon stock is absurdly cheap
$50.1 billion
As of this writing, Amazon trades at a price-to-free-cash-flow multiple (P/FCF) of just 29.5, a significant discount to its 10-year average P/FCF of approximately 82. Meanwhile, other Magnificent Seven members Microsoft and Alphabet (both of which also have ecosystems) trade at P/FCF multiples of 41.9 and 38.7, respectively.
$52.9 billion
Not only does Amazon trade at a sizable discount compared to its rivals, but it's also historically inexpensive when compared to its own past valuations.
$47.7 billion
Given its strong cash flow profile and my belief that AI will drive this growth even further, combined with its bargain-basement valuation, I think Amazon is the most enticing buy-and-hold option among the Magnificent Seven for long-term investors. Now seems like a great time to scoop up shares at a reasonable cost.
In the context of Amazon's potential growth, investing in its stock could prove to be a wise financial decision due to its discounted price-to-free-cash-flow multiple compared to rivals like Microsoft and Alphabet. Additionally, Amazon's significant cash reserves and the potential of AI to further enhance its business could result in impressive financial growth in the coming years, making it an attractive long-term investment option.