In the midst of this year's market recovery, large tech-oriented companies have once again taken center stage, earning themselves the title of the "Magnificent Seven." Led by Nvidia Corp., whose shares nearly tripled during the first half of the year, these companies have captured investors' attention.
However, Amazon.com Inc. presents an intriguing opportunity, standing out as the cheapest among the seven on a forward price-to-sales basis. This article aims to provide a comprehensive analysis of the Magnificent Seven, exploring their performance, valuation metrics, and potential contenders for the next wave of dominant players in the stock market.
Performance Analysis
Despite an impressive performance by all the Magnificent Seven companies and the broader S&P 500, four out of the seven, including the index itself, still struggle to regain their year-end 2021 levels. Even Apple Inc., which achieved a 50% return in the first half of the year, fell short of securing a spot among the top 10 performers in the S&P 500. This suggests that while the tech sector has regained momentum, challenges remain for some companies to fully recover.
Valuation Metrics
To gain deeper insights into the valuation of the Magnificent Seven, let's examine their current forward price-to-earnings (P/E) ratios based on consensus estimates for the next 12 months. Nvidia Corp., with a forward P/E of 48.70, showcases robust growth potential and investor confidence. Meta Platforms Inc. and Tesla Inc. follow suit with forward P/E ratios of 21.42 and 63.19, respectively.
However, it is Amazon.com Inc. that steals the spotlight as the cheapest among the seven, boasting a forward P/E of 61.72. Apple Inc. and Microsoft Corp. hover around the 30 mark, while Alphabet Inc. trails behind with a forward P/E of 20.31. Interestingly, the S&P 500, with a forward P/E of 19.27, presents a favorable comparison, emphasizing the attractiveness of these tech companies.
Market Capitalization
Apple Inc.'s remarkable achievement of reaching a $3 trillion market capitalization underscores its significance in the S&P 500, which assigns weights based on market cap. With a weight of 7.7% in the SPDR S&P 500 ETF Trust, Apple holds a dominant position in the benchmark index. On the other hand, Amazon.com Inc. stands out with the lowest forward price-to-sales ratio among the Magnificent Seven, making it an intriguing choice for investors. Meta Platforms Inc. and Alphabet Inc. also exhibit relatively attractive valuations based on this metric but fall short compared to Amazon's appeal in the next set of estimates.
Sales Growth Potential
When analyzing the expected compound annual growth rates (CAGR) for sales from 2023 through 2025, Amazon emerges as an enticing investment option among the Magnificent Seven.
With an estimated two-year sales CAGR of 12%, it outperforms Meta Platforms Inc. and Alphabet Inc., which boast relatively low price-to-sales ratios compared to their 10-year averages. Nvidia Corp. and Tesla Inc., with their high rates of revenue growth through 2025, solidify their positions as potential contenders for the future. However, investors should be mindful of these companies' lofty valuations, as discussed by Mark Hulbert in a recent analysis.
Rebounding from Adversity
One of the key factors contributing to the Magnificent Seven's resilience is their ability to rebound from adversity. These companies have shown their agility and capacity to overcome challenges, demonstrating their staying power in the stock market. For instance, Nvidia Corp., despite experiencing a significant dip in shares during the first half of 2022, bounced back strongly with nearly tripled shares in the first half of this year. Such instances serve as a valuable lesson for investors, emphasizing the importance of a long-term perspective and the potential rewards of investing in strong and adaptable companies.
Bottom Line
While the Magnificent Seven have demonstrated remarkable performance during the stock market recovery, Amazon.com Inc. stands out as an attractive investment choice due to its compelling valuation and strong sales growth potential. However, investors should carefully evaluate their risk tolerance and investment strategies when considering these tech-oriented companies. Staying informed and adapting investment decisions to navigate the dynamic landscape of the stock market will be crucial for investors seeking long-term success.
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