For more than a year, Wall Street has been putting smiles on most investors' faces. Following bear market declines in 2022 for the iconic Dow Jones Industrial Average, broad-based S&P 500, and innovation-fueled Nasdaq Composite, all three major stock indexes have powered their way to record-closing highs in 2024.
Although there's no shortage of factors that have fed the current bull market, such as a lower inflation rate and the continued strength of the U.S. economy, much of the heavy lifting has fallen on the shoulders of the "Magnificent Seven."
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The Magnificent Seven are some of Wall Street's most influential businesses
The Magnificent Seven represent seven of the largest and most prominent businesses on the planet in terms of both aggregate sales and innovation. Listed in order of descending market cap, the Magnificent Seven are:
- Microsoft (MSFT -1.23%)
- Apple (AAPL +2.78%)
- Nvidia (NVDA -1.39%)
- Amazon (AMZN -2.15%)
- Alphabet (GOOGL -1.43%)(GOOG -1.21%)
- Meta Platforms (META +0.95%)
- Tesla (TSLA -3.16%)
Aside from handily outperforming all three major stock indexes over long periods, the Magnificent Seven offer sustained competitive advantages, if not outright impenetrable moats.
- Microsoft is the dominant provider of desktop operating systems (Windows) and has seen its share of global cloud infrastructure service spend jump to 25%, thanks to Azure.
- Apple's iPhone has accounted for around half or more of the U.S. smartphone market share since becoming 5G-capable. The company has also bought back a jaw-dropping $651 billion of its own stock in 11 years.
- Nvidia's A100 and H100 graphics processing units (GPUs) may account for a virtual monopoly (90%-plus share) of GPUs in use in high-compute data centers this year.
- Amazon leads in two categories. It's the far-and-away biggest player in e-commerce and held a 31% share of global cloud infrastructure service spend via Amazon Web Services (AWS), as of September 2023.
- Alphabet's Google is a virtual monopoly in internet search, with close to 92% of worldwide share in February. Alphabet also owns the second-most-visited social site (YouTube) and the No. 3 cloud infrastructure service platform (Google Cloud).
- Meta Platforms is the owner of Facebook, the most visited social site in the world. Collectively, including Instagram, WhatsApp, Threads, and other apps, Meta attracts nearly 4 billion monthly active users to its social media "real estate."
- Tesla is North America's leading producer of electric vehicles (EVs) and the only pure-play EV manufacturer that's generating a recurring profit.
While all seven of these components have been phenomenal long-term investments, their outlooks going forward could differ greatly -- and that all starts with their valuations.
Ranking the Magnificent Seven stocks from cheapest to priciest using a common valuation tool
To be upfront, analyzing the valuations of public companies can be subjective. What one investor believes is pricey, another might view as an incredible deal. Likewise, fundamental metrics are fluid and constantly changing as companies report their operating results and Wall Street analysts react to this data.
Nevertheless, the price-to-earnings (P/E) ratio has stood the test of time as the most rudimentary measure of value for public companies. But since Wall Street is forward-looking, utilizing the forward P/E ratio, which takes into account consensus earnings per share (EPS) for the upcoming year, makes the most sense.
Based on consensus estimates from Wall Street, as of the closing bell on March 13, here's how the Magnificent Seven ranked from cheapest to priciest using this common valuation tool:
- Alphabet (Class A shares, GOOGL): 17.83 forward P/E ratio
- Meta Platforms: 21.56
- Apple: 23.9
- Nvidia: 30.43
- Microsoft: 31.07
- Amazon: 33.95
- Tesla: 41.14
To offer some context, the forward P/E ratios for the benchmark S&P 500 and growth-driven Nasdaq 100 are 21.1 and 31.32, respectively.
Based purely on earnings potential for the coming year, Amazon and Tesla appear relatively pricey, while Alphabet and Meta Platforms look like bargains. The latter is particularly interesting, given that Meta has more than quintupled since its 2022 bear market bottom yet remains attractively valued, based on consensus EPS estimates for the company.
However, the forward P/E ratio doesn't provide the most complete story in terms of valuation. While it can be a helpful tool for assessing mature businesses, an even better measure of value exists for the generally faster-growing and innovation-driven Magnificent Seven.
Image source: Getty Images.
This is the smartest way to rank the Magnificent Seven from cheapest to most expensive
In addition to being dominant within their respective industries, the Magnificent Seven share another trait: They tend to reinvest a sizable percentage of their operating cash flow back into their respective businesses. In other words, they're willing to forgo maximum profits in the short term to invest in higher-growth initiatives that could really fuel their growth rates years down the road.
Rather than relying on the forward P/E ratio, analyzing the multiple that each company trades at relative to its forward-year consensus cash flow is a considerably smarter way to value these dominant businesses.
Here's how the Magnificent Seven stocks rank from cheapest to most expensive when examined relative to next year's cash flow:
- Alphabet (Class A shares, GOOGL): 12.53 times next year's cash consensus cash flow
- Amazon: 12.8
- Meta Platforms: 13.19
- Apple: 21.1
- Microsoft: 24.15
- Tesla: 27.38
- Nvidia: 30.59
On one hand, Microsoft, Tesla, and especially Nvidia are making it tougher for growth seekers to find value. Tesla's operating margin is falling as it slashes prices on its production models in order to keep inventory levels under control. Meanwhile, Nvidia is set to face a laundry list of headwinds -- including AI GPU competition from many of its top customers (which are Magnificent Seven components).
At the other end of the spectrum, Amazon is historically inexpensive, relative to its future cash flow. As AWS grows into a larger percentage of net sales, Amazon could see its cash-flow growth handily outpace its annual sales growth. Meanwhile, Meta Platforms confirms that it's still a potential bargain at just 13 times forward-year cash flow.
NASDAQ: GOOGL
Key Data Points
But the best deal within the Magnificent Seven is Alphabet, which also happens to be the cheapest constituent when using the forward P/E ratio.
Alphabet's foundational operating segment continues to be Google. With a nearly 92% share of worldwide internet search, Google is the logical go-to for advertisers looking to target their message(s) to specific consumers. More often than not, this will give Google exceptionally strong ad-pricing power.
In addition to Alphabet's advertising segments benefiting from long-winded economic expansions, Google Cloud looks like a force to be reckoned with. After years of operating losses, Google Cloud delivered its first operating profit in 2023.
Cloud service margins are considerably more robust than advertising margins, and enterprise cloud spending is likely in its early innings. In short, this segment may be Alphabet's prime source of cash-flow growth throughout the remainder of the decade.
If you're looking for a deal among the Magnificent Seven stocks, the data suggests you can't go wrong with Alphabet.
