Wall Street’s “Magnificent Seven” tech giants have played a key role in driving the three major stock indexes to repeated record highs. As the most influential companies in the U.S. stock market, they possess sustainable moats and/or competitive advantages.
However, the “Magnificent Seven” are not all the same—their valuations prove this point. The forward price-to-earnings ratio of Nvidia (NVDA), the leader in the artificial intelligence revolution, is at one of its lowest levels in some time, but it may not be as cheap as you think. Meanwhile, according to a key operational metric, the dual-industry giant Amazon (AMZN) has never been cheaper.
On one hand, Nvidia holds absolute dominance in the field of artificial intelligence. Its graphics processing units (GPUs) enjoy a near-monopoly in the enterprise data center market, and its hardware maintains a clear advantage in computing power over competitors. The persistent GPU shortage, combined with its superior computing capabilities, allows Nvidia to command significant premiums for its AI hardware.
As Nvidia continues to surpass Wall Street’s consensus expectations for sales and profits, the company’s stock currently trades at just 16 times forward annual earnings.
However, history shows that AI hardware stocks are vulnerable to AI bubble bursts. Since the advent of the internet over thirty years ago, every world-changing technology has experienced a bubble period, driven by investors overestimating the adoption and/or optimization of new technologies. The latter—optimization—will serve as the catalyst for the bursting of the AI bubble.
Nvidia may also lose valuable market share in the data center space. Many of its largest customers, based on net sales, are developing their own AI chips for their data centers. While these chips do not perform as well as Nvidia’s hardware, they are cheaper and more readily available.
At the other extreme is Amazon. Using traditional price-to-earnings ratios, this company may not appear cheap, but relative to its expected cash flow, its valuation is remarkably low.
Most people likely know that Amazon is the undisputed leader in U.S. e-commerce. While this is a high-revenue segment, the profit margins associated with online retail are low. Amazon’s other leading segment—Amazon Web Services (AWS)—is the primary contributor to its cash flow generation.
By total expenditure, AWS is the world’s number-one cloud infrastructure services platform. Most importantly, its sales growth is re-accelerating—thanks to the integration of generative AI solutions and large language model capabilities, AWS’s fourth-quarter sales grew 24% year over year.
Beyond AWS, Amazon’s subscription services (such as Prime membership) and advertising services have also maintained double-digit sales growth. Its expanding content network and leading online marketplace give the company exceptional advertising pricing power.
Finally, Amazon’s valuation is more attractive than ever. Right now, opportunistic investors can buy Amazon stock at 9.8 times expected 2027 cash flow, representing a 48% discount to its average cash flow multiple over the past five years.
