Finance
1 ‘Magnificent Seven’ Stocks That Could Go Parabolic If the Fed Cuts Rates in September
The “Beautiful seven” is a nickname used to collectively describe the world’s largest technology companies — Apple, Microsoft, Nvidia, Alphabet, Amazon (NASDAQ: AMZN), MetaAnd Tesla.
An interesting feature of the Magnificent Seven is that each company is so diverse and encompasses so many different end markets that this mega-cap cohort can shed a lot of light on the overall health of the economy.
Investors know that two prominent themes of the macro environment in recent years are persistent inflation and high interest rates. But a few days ago, Federal Reserve Chairman Jerome Powell said at the Economic Policy Symposium in Jackson Hole, Wyoming, “The time has come for policy adjustment.”
That seems like an interest rate cut to me. Should the Fed start tapering rates, I think there’s a good case to be made that each of the Magnificent Seven stocks will continue to thrive.
However, I see Amazon as the candidate with the most upside. Let’s explore how changes in monetary policy could boost Amazon and assess why it now looks like a lucrative opportunity to buy the stock.
A new spark for e-commerce
Amazon’s largest source of revenue comes from its e-commerce marketplace. The table below illustrates the annual revenue growth trends related to Amazon’s online marketplace over the past year.
|
Category |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Online stores |
5% |
6% |
8% |
7% |
6% |
|
Physical stores |
7% |
6% |
4% |
6% |
4% |
|
Services from Third Party Vendors |
18% |
18% |
19% |
16% |
13% |
|
Subscription services |
14% |
13% |
13% |
11% |
11% |
Data source: Investor Relations.
Do you notice patterns? The growth of brick-and-mortar stores, third-party seller commissions, and subscriptions like Amazon Prime have all slowed in the past year. Although online sales revenue improved modestly, quarterly results were quite inconsistent.
However, this should not be a surprise. Although inflation has cooled dramatically in 2023, inflation is still lingering. Goods and services continue to rise in price, just not as quickly. When you combine abnormally high inflation with rising interest rates, it’s not entirely surprising to see a slowdown in online shopping and subscription services.
If the Fed cuts rates in September, I think such a move will be very well received. Even a modest reduction in borrowing costs can go a long way to boosting consumer purchasing power. I think interest rate cuts will serve as a catalyst for Amazon’s e-commerce segment and fuel new growth for the company’s largest business.
Besides, I think Amazon’s e-commerce partnerships with social media powerhouses they seem all the more sensible now that interest rate cuts seem to be approaching.
More investments in artificial intelligence (AI)
While Amazon’s e-commerce business has faced an uphill battle over the past year, the company has managed to generate growth from other sources. In fact, the cloud computing platform Amazon Web Services (AWS) has benefited greatly from the artificial intelligence (AI) revolution.
Like my thesis on e-commerce, I think interest rate cuts will provide companies of all sizes with new financial flexibility. In turn, AWS appears poised for some acceleration as companies continue to increase investment in AI applications.
Why Amazon stock seems poised to boom right now
During the trailing twelve months ended June 30, Amazon generated $53 billion in free cash flow – up 572% year over year. Considering that Amazon’s overall revenue is only growing 10% year over year, it’s incredible to see such a significant increase in profitability numbers.
Over the past decade, Amazon’s market capitalization has increased by approximately 1,140%. Over the same period, the company’s free cash flow roughly quadrupled.
Amazon’s current price to free cash flow (P/FCF) ratio is 38.9. By comparison, the company’s average 10-year price-to-earnings ratio is about 84. This means that Amazon’s stock is technically more reasonably priced today than it was a decade ago, despite the fact that it has evolved into a much larger , a complex company covering a large number of new markets. possibilities.
To me, investors are really overlooking Amazon’s stock right now and not fully reflecting how quickly the company can reach new levels of profitability. Amazon has managed to grow free cash flow exponentially even in a time of unpredictable revenue growth, but I don’t think its current valuation fully reflects this dynamic.
With a lot of cash on the balance sheet and the possibility of rate cuts looming, I think Amazon’s business is about to get a boost from rejuvenated consumers and businesses alike, and I see this as a great time to buy shares.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
1 ‘Magnificent Seven’ Stocks That Could Go Parabolic If the Fed Cuts Rates in September was originally published by The Motley Fool
