Ranking “Magnificent Seven” stocks from lowest to highest

For more than a year, Wall Street has been putting smiles on most investors’ faces. Following the bear market decline in 2022, symbolic markets Dow Jones Industrial Averageextensive S&P500and driven by innovation. Nasdaq Compositeall three major stock indexes are on track to hit record highs in 2024.

While there are plenty of factors supporting the current bull market, including falling inflation and a strong U.S. economy, much of the heavy lifting falls on the shoulders of the Magnificent Seven.

Image source: Getty Images.

The Magnificent Seven are some of Wall Street’s most influential companies

The Magnificent Seven represents seven of the largest and most prominent companies on the planet, both in terms of total revenue and innovation. The Magnificent Seven, listed in descending order of market capitalization, are:

• microsoft (MSFT 2.44%)
• apple (AAPL 1.09%)
• Nvidia (NVDA -3.24%)
• Amazon (AMZN 1.24%)
• alphabet (Google 2.37%) (GOOG 2.54%)
• meta platform (meta -0.76%)
• tesla (TSLA -4.12%)

In addition to easily outperforming all three major stock indexes over long periods of time, the Magnificent Seven offers a sustained competitive advantage, if not a completely impregnable moat.

• Microsoft is a leading provider of desktop operating systems (Windows), and Azure has boosted its share of global cloud infrastructure services spending to 25%.
• Since Apple’s iPhone became 5G-enabled, it has accounted for more than half of the US smartphone market share. The company has also repurchased a staggering $651 billion in stock over 11 years.
• This year, Nvidia’s A100 and H100 graphics processing units (GPUs) could take on a virtual monopoly (more than 90% share) of GPUs used in high-computing data centers.
• Amazon leads in two categories. The company is by far the largest player in e-commerce, with a 31% share of global cloud infrastructure services spending via Amazon Web Services (AWS) as of September 2023.
• Alphabet Inc.’s Google has a de facto monopoly on Internet search, with nearly 92% of the global market share as of February. Alphabet also owns the second most visited social site (YouTube) and the third most visited cloud infrastructure services platform (Google Cloud).
• Meta Platforms is the owner of Facebook, the world’s most visited social site. Including Instagram, WhatsApp, Threads, and other apps, Meta attracts nearly 4 billion monthly active users to his social media “real estate.”
• Tesla is North America’s leading electric vehicle (EV) manufacturer and the only pure EV manufacturer with recurring profits.

MSFT data by YCharts.

All seven of these components were incredible long-term investments, but their future prospects could be very different. And it all starts with that evaluation.

Rank Magnificent Seven stocks from lowest to highest using a common valuation tool

Frankly, analyzing the valuation of public companies can be subjective. What one investor believes is overvalued, another may think is an incredible deal. Similarly, fundamental metrics are fluid and constantly changing as companies report their results and Wall Street analysts react to this data.

Nevertheless, the price-to-earnings ratio (P/E) has stood the test of time as the most basic measure of the value of publicly traded companies. However, since Wall Street is forward-looking, it makes the most sense to use a forward P/E ratio that takes into account next year’s consensus earnings per share (EPS).

Here’s how this popular valuation tool ranks The Magnificent Seven from lowest to highest, as of the closing bell on March 13, based on Wall Street consensus estimates. It is as follows.

• Alphabet (Class A stock, GOOGL): 17.83 Forecast PER
• meta platform:21.56
• apple:23.9
• Nvidia:30.43
• microsoft: 31.07
• Amazon:33.95
• tesla:41.14

To provide some context, here’s the forward P/E ratio for the benchmark. S&P500 Driven by growth Nasdaq 100 are 21.1 and 31.32 respectively.

Purely based on next year’s earnings potential, Amazon and Tesla look relatively expensive, while Alphabet and Metaplatform look like bargains. The latter is particularly interesting given that Meta has grown more than 5x since the bottom of the bear market in 2022, based on the company’s consensus EPS estimates, and remains at an attractive valuation.

However, the forward P/E ratio does not provide the most complete information regarding valuation. While this is a useful tool for valuing mature businesses, there are better measures of value for the Magnificent Seven, which are typically fast-growing and innovation-driven.

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 characteristic: That means they tend to reinvest a significant percentage of their operating cash flow back into their respective businesses. In other words, they are willing to sacrifice maximum short-term returns to invest in high-growth initiatives that may actually increase growth rates in the years ahead.

Analyzing the multiple of each company’s stock price to its future consensus cash flows, rather than relying on future P/E ratios, is a pretty smart way to value these dominant businesses.

Here’s how we rank the Magnificent Seven stocks from cheapest to most expensive when examined relative to next year’s cash flow.

• Alphabet (Class A stock, GOOGL): 12.53 times next year’s cash consensus cash flow
• Amazon:12.8
• meta platform: 13.19
• apple:21.1
• microsoft: 24.15
• tesla:27.38
• Nvidia:30.59

On the other hand, Microsoft, Tesla, and especially Nvidia are making it more difficult for companies looking for growth to find value. Tesla has lowered prices on mass-produced models to keep inventory levels down, causing operating margins to decline. Meanwhile, Nvidia will face one headwind after another, including AI GPU competition from many of its top customers (components of the Magnificent Seven).

At the other end of the spectrum, Amazon is historically cheap relative to its future cash flows. As AWS becomes a larger share of net sales, Amazon’s cash flow growth could easily outpace its annual sales growth. Meta Platforms, on the other hand, trades at just 13x year-over-year cash flow, confirming that it could still be a bargain.

But the best deal in the Magnificent Seven is Alphabet, which also happens to be the cheapest component using forward P/E ratios.

Alphabet’s fundamental business segment remains Google. With nearly 92% of global internet searches, Google is the logical go-to for advertisers looking to target their messages to specific consumers. In many cases, this gives Google very strong ad pricing power.

In addition to Alphabet’s advertising segment benefiting from a long-term economic expansion, Google Cloud also looks like a force to be reckoned with. Google Cloud achieved its first operating profit in 2023 after years of operating losses.

Cloud service margins are much stronger than advertising margins, and enterprise cloud spending is considered to be in its infancy. That means this division could be Alphabet’s main source of cash flow growth for the rest of the decade.

If you’re looking to trade Magnificent Seven stocks, our data shows you can’t go wrong with Alphabet.