Wall Street’s “Magnificent Seven” have played a pivotal role in sending all three major stock indexes to new heights. These are the stock market’s most influential companies, and they possess a healthy combination of sustainable moats and/or competitive advantages.
But not all members of the Magnificent Seven are created equally — and their valuations prove it. While the face of the artificial intelligence (AI) revolution, Nvidia (NVDA +1.80%), is trading at one of its lowest forward price-to-earnings (P/E) ratios in some time, it may not be the bargain you think it is. Meanwhile, dual-industry leader Amazon (AMZN +2.33%) has never been cheaper, according to one key operating metric.
Image source: Getty Images.
Wall Street’s AI goliath may not be as cheap as it appears
On the one hand, Nvidia has been utterly dominant in the AI arena. Its graphics processing units (GPUs) hold a virtual monopoly in enterprise data centers, with its hardware maintaining clear compute advantages over rivals. Ongoing GPU scarcity and its superior compute have enabled Nvidia to charge a hefty premium for its AI hardware.
With Nvidia consistently crushing Wall Street’s consensus sales and profit expectations, its shares can be purchased for just 16 times forward-year earnings.
Today’s Change
(1.80%) $3.11
Current Price
$175.81
Key Data Points
Market Cap
$4.3T
Day’s Range
$174.76 – $178.37
52wk Range
$86.62 – $212.19
Volume
15K
Avg Vol
175M
Gross Margin
71.07%
Dividend Yield
0.02%
However, history suggests that artificial intelligence hardware stocks are susceptible to an AI bubble-bursting event. Every game-changing technology since the advent of the internet over three decades ago has navigated its way through a bubble caused by investors overestimating the adoption and/or optimization of a new technology. The latter (optimization) would be the catalyst for an AI bubble-bursting event.
Nvidia may also lose valuable data center real estate. Many of its top customers by net sales are developing AI chips for their data centers. Though these chips aren’t superior to Nvidia’s hardware, they’re cheaper and more accessible.
There’s a valuation concern, as well. Nvidia’s price-to-sales (P/S) ratio briefly topped 30 in early November (a level commonly associated with valuation bubbles), and it remains above 20, as of this writing on March 19.
Image source: Amazon.
Amazon has never been this inexpensive, relative to projected cash flow
At the other end of the spectrum is Amazon, a company that doesn’t look particularly cheap using the traditional P/E ratio, but is quite inexpensive relative to its projected cash flow.
Most folks are likely aware that Amazon is the runaway leader in U.S. e-commerce. While this is a high-dollar operating segment, margins associated with online retail sales are slim. It’s Amazon’s other leading operating segment, Amazon Web Services (AWS), that’s responsible for much of the heavy lifting on the cash flow generation front.
Today’s Change
(2.33%) $4.78
Current Price
$210.15
Key Data Points
Market Cap
$2.3T
Day’s Range
$209.51 – $212.80
52wk Range
$161.38 – $258.60
Volume
1.8K
Avg Vol
49M
Gross Margin
50.29%
AWS is the world’s No. 1 cloud infrastructure service platform by total spend. Most importantly, sales growth is reaccelerating — AWS sales jumped 24% in the fourth quarter compared with the previous year — thanks to the incorporation of generative AI solutions and large language model capabilities.
In addition to AWS, Amazon has sustained double-digit sales growth from subscription services (e.g., Prime) and advertising services. A growing content network and leading online marketplace afford the company exceptional ad pricing power.
Lastly, Amazon’s valuation is more attractive than it’s ever been. Investors paid a median of 30 times year-end cash flow to own shares throughout the 2010s. Opportunistic investors can buy Amazon stock right now for 9.8 times forecast cash flow in 2027, representing a 48% discount to its average multiple to cash flow over the trailing five years.
