The stock market is off to a shaky start to 2025, with the S&P 500 (^GSPC 1.33%) index down nearly 12% from its recent all-time high. With that said, it's coming off back-to-back annual gains of more than 25% in both 2023 and 2024, which is something it has only achieved on one other occasion in its history dating back to 1957. Markets don't move up in a straight line, so periodic weakness is a completely normal part of the investing journey.
In fact, the recent sell-off is giving investors a rare chance to buy some of America's highest-quality stocks at a discount. There is a particular group of stocks called the "Magnificent Seven," which earned their nickname for their size, their leadership positions in their respective industries, and their tendency to lead the broader market higher. The group has a combined value of $14.3 trillion, and it includes:
- Apple: $3.05 trillion.
- Microsoft (MSFT 0.43%): $2.79 trillion.
- Nvidia: $2.5 trillion.
- Amazon (AMZN 2.61%): $1.91 trillion.
- Alphabet: $1.84 trillion.
- Meta Platforms: $1.37 trillion.
- Tesla: $860 billion.
The two Magnificent Seven stocks I want to focus on today are Microsoft and Amazon, which are currently down 19.7% and 25.8% from their all-time highs, respectively. Investors can buy both of them at the cheapest level in years based on one traditional valuation metric, and considering their leadership positions in hypergrowth industries like artificial intelligence (AI), here's why that might be a great idea for the long term.
Image source: Getty Images.
The case for Microsoft
Microsoft was founded in 1975, and some of its earliest products like Windows and Word are still used by over 1 billion people globally. The company is now applying its vast software expertise to develop AI products, and to accelerate its progress, it has invested around $14 billion in ChatGPT creator OpenAI since 2019. Microsoft has used the start-up's industry-leading models to help create its own AI assistant, called Copilot, and to build a portfolio of AI services for its Azure cloud platform.
Copilot is already integrated into Microsoft's legacy software products like Windows, the Edge internet browser, and the Bing search engine, and it's also available for the 365 productivity suite (which includes Word, PowerPoint, and Excel) for an extra monthly subscription fee. Organizations around the world pay for around 400 million 365 licenses for their employees, and all of them are candidates for the Copilot add-on, so this presents an enormous financial opportunity.
As of the fiscal 2025 second quarter (ended Dec. 31), organizations that bought Copilot for 365 during its first quarter of availability 18 months prior had already expanded their licenses tenfold. Moreover, their employees were actively using Copilot 60% more frequently than they were in the fiscal 2025 first quarter just three months earlier.
NASDAQ: MSFT
Key Data Points
Turning to Microsoft's Azure cloud platform, the company said revenue relating to AI services soared by a staggering 157% year over year during the second quarter. Azure AI offers businesses the computing capacity they need to develop their own AI software, via Microsoft's enormous centralized data centers, which are filled with advanced chips from suppliers like Nvidia. It also offers a suite of ready-made large language models (LLMs) from leading third parties like OpenAI, which businesses can adapt for their own purposes to accelerate development.
The Azure cloud platform delivered overall revenue growth of 31% year over year during the second quarter, and Azure AI accounted for 13 percentage points of that total, which was a record high. In other words, AI is quickly becoming the key driver of growth for one of Microsoft's most important business units.
Following the nearly 20% decline from its all-time high, Microsoft stock now trades at a price-to-earnings (P/E) ratio of 30.2. It's the cheapest valuation since mid-2023, and it's also an 8.9% discount to its 10-year average P/E ratio of 33.2:
Data by YCharts.
As a result, this is a relatively rare opportunity for investors to scoop Microsoft stock up at a discount. They might be glad they did when they look back on this moment in a few years, considering the lightning-fast growth of its AI products.
The case for Amazon
Amazon is the world's biggest e-commerce company, but it also dominates the cloud computing industry through its Amazon Web Services (AWS) platform. That's right, it's even larger (by revenue) than Microsoft Azure, which sits in second place. AWS is aiming to lead the three core layers of the AI race over the long term: infrastructure (data centers and chips), large language models, and software.
At the first layer, AWS designed its own data center chips called Trainium (for AI training) and Inferentia (for AI inference), which can reduce costs by up to 40% for developers compared to using chips from suppliers like Nvidia. At the middle layer, the AWS Bedrock platform offers access to over 100 ready-made LLMs from third parties like Anthropic, in addition to Amazon's own family of models called Nova, which are up to 75% cheaper to use than most of the competition.
In other words, developers can save substantial amounts of money by using a combination of Amazon's chips and its LLMs, which in turn could help AWS capture more AI and cloud market share.
NASDAQ: AMZN
Key Data Points
At the third and final layer is Amazon's virtual assistant called "Q," which is embedded into AWS. Businesses can use it to identify valuable trends in their data to help them save money and generate more revenue, or they can use it as a powerful coding assistant to accelerate software development projects. The best part is it understands natural language, so it can supercharge workflows for every employee on AWS, not just those in technical roles.
Amazon generated $637.9 billion in total revenue during 2024, and AWS accounted for just $107.5 billion of that total. However, AWS was responsible for a whopping 58% of the entire organization's operating income of $68.6 billion for the year, which is why Wall Street is so focused on the cloud platform. As AI drives more growth for AWS, it's going to supercharge the entire company's profits.
Speaking of which, Amazon's total earnings per share (EPS) soared by 90% during 2024, coming in at $5.53. When you combine that growth with the nearly 26% decline in Amazon stock, you get a P/E ratio of around 32 which is the cheapest valuation since 2009:
Data by YCharts.
In other words, this could be the best buying opportunity Amazon stock has presented in more than a decade. Given the sheer scale of AWS, it's in prime position to dominate the AI race, which could be one of the most valuable opportunities in Amazon's history.
