The inflation panic took the wind out of Wall Street's sails, especially where it crosses Silicon Valley in a proverbial sense. The stocks of tech titans Amazon.com (AMZN +3.97%) and Alphabet (GOOG 0.04%) (GOOGL 0.11%) took a beating as investors backed away from growth-oriented ideas.
Amazon's shares fell as much as 57% from its pre-panic record price. The Google parent's price drop stopped at 46%. Only now, more than two years later, are they sniffing at fresh all-time highs again.
I don't think this is the last hurrah from two tired comeback stories. Instead, I see Alphabet and Amazon as the two best buys in the "Magnificent Seven" group right now, with tremendous returns on the long-term horizon. You should consider grabbing some of these top-quality stocks while they're still relatively affordable.
Amazon and Alphabet's big AI bets
First, I'd like to point out that Amazon and Alphabet have plenty of irons in the artificial intelligence (AI) fires. They may not be as deeply and directly involved in the frenzy for generative AI and large language models (LLMs) as Nvidia (NVDA +1.68%), but you're looking at two of the leading providers of cloud-based computing services.
- Google Cloud and Amazon Web Services play significant roles in the back-end of everyone else's AI ambitions, crunching the required numbers in their global data center networks.
- They also offer their own AI tools, led by the ChatGPT-like Google Gemini platform and the Amazon Lex chatbot. You may not be familiar with Lex, but it's basically the same technology that powers Amazon Alexa, made available for any developer in need of a conversationsl natural language system.
- How committed to AI innovation are Google and Amazon? Well, both companies use the latest and greatest AI acceleration hardware from Nvidia and Advanced Micro Devices (AMD +5.82%), but that's not all. The Cloud TPU and AWS Inferentia chips are proprietary AI accelerator chips designed by Google's and Amazon's own engineers, respectively.
And they are heavy users of AI tools in their daily work, too. You'll find AI behind the scenes of many consumer-facing services, from travel routes in Google Maps and Amazon's automated warehouse management to YouTube's video recommendation engine and Alexa's helpful chatter.
These stocks aren't expensive, even at all-time highs
So I'm not saying that Amazon's and Alphabet's stocks should have tripled over the last year, like Nvidia. But their rebound from the rock-bottom pricing of the inflation crisis was slower than they deserved. I can't believe it took this long just to get back to prices last seen in November 2021.
And they're priced to keep on moving, too.
Shares of Amazon are changing hands at the bargain-bin valuation of 3.2 times sales. Alphabet's price-to-sales ratio (P/S) clocks in at 6.1. In a world where Microsoft (MSFT +0.34%) commands a double-digit P/S ratio and Nvidia has soared to 39 times sales, these figures strike me as big market-maker mistakes.
NASDAQ: AMZN
Key Data Points
Why Amazon and Alphabet aren't skyrocketing (yet)
Of course, Wall Street had its reasons to keep Alphabet and Amazon under wraps while most of their "Magnificent Seven" peers soared.
The digital advertising market fell into a deep recession in 2022. Inflationary pressure is no joke -- consumers held on to their wallets with both hands while everybody's cost of doing business rose. That's not a great environment for launching extravagant marketing campaigns. The economic pressure has subsided in recent quarters but I'm still not talking about a full-fledged return to optimal health. So Alphabet's ad-based business has seen slower growth than usual, and the stock arguably deserves a bit of a discount under these circumstances.
The same market reality also held back Amazon's retail sales. The inflation crunch started knee-deep in the all-important holiday season of 2021. The e-commerce veteran had to cut costs, slow down its spending on the delivery infrastructure, and absorb two years of low-grade growth. Again, I see why risk-averse investors would stay away from Amazon against that backdrop.
NASDAQ: GOOGL
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Amazon and Alphabet should soar soon enough
Amazon and Alphabet, with their undaunted investments in AI and cloud computing, are not just surviving the storm but blazing their own paths through it.
The key takeaway? Investors should try to tune out the market noise and focus on the fundamentals. These tech giants look undervalued today, but that doesn't mean you should consider selling your shares to find better alternatives. On the contrary, the modest pricing is an open invitation to grab fistfuls of Alphabet and Amazon shares at a reasonable price.
In the end, no downturn lasts forever. This pair of "Magnificent Seven" beasts is prepared to truly soar when the American and global economy gets back on its feet.
The companies that drive tomorrow's innovations will deliver the most enduring returns. That's what Amazon and Alphabet do, and I can't wait to see how they will fare in the current bull market.
