DR Barton, principal at Woodshaw Financial Group, shares insights on Alphabet’s rising investments in artificial intelligence, suggesting that the recent market dip presents a good opportunity for buying Alphabet stocks at Barney & Co.
Since early June, major stock indexes across Wall Street have consistently reached new heights. The driving force behind this surge is artificial intelligence, although the so-called “Magnificent Seven” have contributed significantly to the gains.
These companies are among the most powerful on Wall Street, with a heavy reliance on the AI boom for future growth. However, they also show quite varied prospects when it comes to operating cash flow.
Ranking the Magnificent Seven by Next Year’s Cash Flow
While traditional price-to-earnings ratios can be comforting for assessing mature companies, they don’t quite fit for growth stocks, including the Magnificent Seven. Due to their focus on reinvesting in growth, future cash flows are likely a more relevant valuation metric.
Magnificent 7 stocks have seen significant declines amid concerns over AI spending
This is how the Magnificent Seven stack up, from the most appealing (cheapest) to the least appealing, based on projected cash flow for the coming year (as of July 23):
- Meta Platforms: 9.44 times expected cash flow
- Amazon: 10.36
- Microsoft: 13.04
- Alphabet: 14.87
- Nvidia: 15.79
- Apple: 28.82
- Tesla: 64.71
From a cash flow perspective, both Tesla and Apple don’t appear particularly inviting. In contrast, Meta and Amazon shine even in this historically pricey market.
As the market grows costlier, Meta and Amazon appear as bargains.
Meta Platforms is the standout among the Magnificent Seven, suggesting that its potential advantages from integrating generative AI into its social media advertising are appealing. Companies that can tailor video and static content to users are boosting click-through rates, enhancing Meta’s ad pricing capability.
However, Meta’s revenue, largely driven by advertising, is linked closely to the performance of the U.S. economy, which has been slow to recover. Though it’s not a revolutionary model, companies seem willing to pay a premium for what Meta offers.
Google is initiating a global survey analyzing millions of AI interactions to better understand AI usage.
Meanwhile, Amazon’s other segment has been a true highlight. Even though its core online market continues to generate most revenue, the cloud services platform Amazon Web Services (AWS) is where the bulk of the operating profit comes from.
Since incorporating generative AI into AWS, sales growth within this profitable sector has picked up again. When you factor in Prime’s strong subscription pricing strategy alongside consistent double-digit growth in ad revenue, it’s clear why analysts believe Amazon’s operating cash flow will more than double from 2025 to 2028.
Bargains are tough to find these days, but Meta and Amazon certainly fit the bill.
