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The Quest for Value: Analyzing the Cheapest ‘Magnificent 7’ Stock in 2024The Quest for Value: Analyzing the Cheapest ‘Magnificent 7’ Stock in 2024

Despite the euphoric heights that the ‘Magnificent 7’ stocks, excluding Tesla (TSLA), find themselves at, the notion of them being “cheap” seems paradoxical. These elite names rarely go on sale as they embody quality and resilience in the market – traits that investors covet.

However, history shows that when fear grips the market, opportunities arise. Remember the adage of Warren Buffett to “buy when there is fear”? Even though the legendary investor tends to steer clear of the tech sector, this principle has often proven profitable in quality tech stocks, as seen during the latest discount window in 2022.

Today, we embark on a journey to assess the current valuations of the ‘Magnificent 7’ stocks, searching for the diamond in the rough, especially in light of their performance in 2024.

Nvidia Ascends: The Stellar Rise of the Best-Performing Stock

Leading the pack in 2024 is Nvidia (NVDA), boasting a year-to-date surge of 142%, making it the star performer among the ‘Magnificent 7’ stocks. Meta Platforms (META) and Alphabet (GOOG) follow, albeit at a distance, with gains of 37.7% and 24.7%, respectively. In the same period, Amazon (AMZN) and Microsoft (MSFT) have risen by 19.3% and 12.3%, while Apple (AAPL) treads water. Tesla lags behind, nursing a YTD loss of 29.3%.

The Hunt for Value: Unveiling the Stock with the Lowest PE Multiple

One of the quintessential metrics for assessing value, the price-to-earnings (PE) ratio, reveals interesting insights. Alphabet boasts the most attractive forward PE multiple at 22.56x, closely trailed by Meta Platforms at 22.13x. Apple clinches third place with a multiple of 29.1x, while Microsoft follows at 35.23x. On the other end of the spectrum, Amazon’s multiple stands at 38x, while Nvidia edges higher at 47x. Tesla holds the highest PE multiple within the ‘Magnificent 7’, soaring at 95x, signaling its struggles in the market.

It’s noteworthy that both Amazon and Tesla currently trade at sizable discounts to their average multiples over the past three years. Nvidia’s multiples linger slightly below its historical average, while Alphabet trades predominantly in line with its historical benchmarks. Conversely, Meta Platforms, Apple, and Microsoft command a premium over their three-year averages.

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Decoding Valuations: The PEG Insight

While the PE ratio offers a glimpse into valuations, delving into the price/earnings-to-growth (PEG) ratio provides a normalized viewpoint that accounts for anticipated earnings growth. Meta emerges with the most attractive multiple of 1.21x, closely shadowed by Nvidia and Amazon, both at 1.28x. Alphabet ranks right behind with 1.29x on the PEG scale. Microsoft and Apple trail with multiples of 2.19x and 2.33x, respectively, while Tesla holds the highest multiple at 4.39x, signaling challenges on the growth front.

In Pursuit of Value: Unveiling the Gem Among Giants

Each ‘Magnificent 7’ constituent operates in a unique landscape, mirrored in their valuation metrics. While all are pivotal players in the AI realm, their levels of prowess differ. Nvidia stands tall as the AI flagbearer, while others like Apple are yet to garner full recognition within the AI sphere.

Considering valuation metrics and long-term growth prospects, Amazon emerges as a beacon of value within the Big Tech realm. With diversified interests spanning ecommerce, cloud services, digital advertising, streaming, and AI, Amazon offers a multi-faceted investment opportunity that sets it apart.

Unpacking the Appeal: The Case for AMZN’s Underrated Value

Amazon’s growth trajectory in ecommerce and Amazon Web Services (AWS) appears steady, supported by burgeoning segments like Amazon Business and its pharmacy arm, coupled with a thriving ad business. Initiatives in Generative AI hint at further revenue and profit boosts, prompting hefty investments in AI operations.

Displaying disciplined financials akin to its Big Tech counterparts, Amazon’s trail of robust free cash flows, exceeding $48.8 billion at the close of Q1, underlines its financial resilience and operational strength.

Although Amazon’s PE multiple may seemingly run high compared to peers, its minimal price-to-free cash flow multiple – the second lowest in the ‘Magnificent 7’ cohort – underscores its underlying value.

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In conclusion, while Nvidia continues to shine brightly among its Big Tech peers, Amazon stands out as a compelling avenue for value seekers amidst the market frenzy. Diversified across multiple sectors and poised for sustained growth, Amazon’s stock presents an enticing opportunity for those seeking stability and value in today’s turbulent markets.