CNBC's Jim Cramer has now created two well-known investing groups to convey the most important stocks in the market. First was the term FAANG; now he's using the phrase "Magnificent Seven" to discuss seven stocks that he believes are vital to the market's success. They are:
- Alphabet
- Amazon (AMZN 3.43%)
- Apple
- Meta Platforms
- Microsoft
- Nvidia
- Tesla
If you've owned any of these stocks in 2023, you're elated with their performance. But with such an incredible year on the books, some may wonder if there's any more left in the tank for this group. I think there is, and there's one company in particular I'm most excited about.
Amazon's stock hasn't been this cheap for a while
To me, the company with the most upside ahead of it is Amazon. There's nothing against the other six, but all of them (except for Alphabet) are valued at the top of their historical valuation ranges. This doesn't leave much room for upside, especially considering that many of these companies are posting incredible results that may not be feasible over the long term.
On the other hand, Amazon has had a great year (up more than 75%) but is still valued at the low end of its historical valuation range.
AMZN PS Ratio data by YCharts
Overlaid on the price-to-sales ratio graph (which shows Amazon hasn't been this cheap since 2016) are two other important trends: Amazon's growth and gross margin. Multiple factors go into what investors are willing to pay for a stock, and these are two of them.
Although Amazon's growth is accelerating, it's nowhere near the levels seen before 2022. This makes investors want to pay less for Amazon stock, as the rapid growth isn't there.
On the flip side is Amazon's rising gross margin. Amazon has nearly doubled its gross margin since 2016, which increases how much investors want to pay for the stock. A higher gross margin allows for a higher profit margin, thus increasing a stock's value.
Right now, the market considers these two factors a wash, so the stock's valuation has risen since the start of 2023 but has not returned to levels seen from 2017 to 2022.
But that assumption is a mistake on Wall Street's part.
Improving gross margin and rising sales will spur the stock on
While these two factors may be a wash right now, what happens if Amazon's sales rise and it continues improving its gross margin?
In 2024, Wall Street expects Amazon to grow its revenue by 11.3%. This above-market pace of growth is key when assessing Amazon's long-term investment prospects. Amazon has also done a tremendous job in becoming more efficient, as evidenced by its operating margin nearing an all-time high.
AMZN Operating Margin (Quarterly) data by YCharts
If Amazon can deliver a full year of high margins, then its profits and cash flow will be incredible, solely due to the size of the business. This will translate into a higher valuation, pushing the stock price up alongside its results, making Amazon a top pick.
Many of the other Magnificent Seven stocks have already maxed out their potential. Amazon has yet to do so, but it is on the right track. That makes it my top Magnificent Seven stock to buy right now, although the others are still good investments.
