The "Magnificent Seven" is a term that CNBC's Jim Cramer coined to describe the leading stocks in today's market. They are:
- Microsoft
- Apple
- Nvidia
- Amazon (AMZN -0.83%)
- Alphabet
- Tesla
- Meta Platforms
This group performed well since the calendar flipped to 2023, and some have continued to notch gains in 2024. But I can only pick one best buy among them, and that's Amazon.
Since the start of 2024, the stock is up about 16%, which may make some people question why I think it's a good buy now. But when you dive deeper into the company, it's evident that the stock's 2024 gains are only the tip of the iceberg.
Amazon's business transformation helped its gross profit margin
Most people know Amazon as an e-commerce specialist from which you can buy practically anything and receive it quickly. Amazon helped pioneer this space from the beginning, but the company has transformed in the past few years.
While it's still a commerce powerhouse, its business shifted more toward the services side of commerce as segments like its third-party seller services, advertising services, subscription services, and Amazon Web Services (AWS, its cloud computing division) grew. In fact, its services divisions brought in $93 billion in revenue during Q4, while its commerce stores only generated $75.7 billion.
Furthermore, these services are also expanding quickly. While its online stores put up respectable year-over-year growth of 9% in the fourth quarter (the best rate since Q3 2022), it paled compared to services.
| Segment | Q4 Revenue Growth (YOY) |
|---|---|
| Third-party seller services | 20% |
| Advertising services | 27% |
| Subscription services | 14% |
| AWS | 13% |
Data source: Amazon. YOY = year over year.
Although Amazon doesn't break out the profit margins of most of these segments (apart from AWS), we can compare the tech titan to other businesses like Shopify (third-party seller services), Meta Platforms (advertising services), and Netflix (subscription services) to get an idea of what kind of gross profit margin these divisions can generate.
SHOP Gross Profit Margin data by YCharts
These margins are substantially higher than what a commerce business can do, so it's no wonder that Amazon's gross profit margin has dramatically risen with these services growing so fast.
AMZN Gross Profit Margin (Quarterly) data by YCharts
As gross margin expands, Amazon has more wiggle room between the cost of revenue and its bottom line. This has allowed its profit margin to improve dramatically, although it still is below levels reached in 2022.
This is because Amazon's commerce segment was doing well thanks to demand driven by many people staying home. You must return to 2018 to find a time when the commerce business operated smoothly without artificial demand. When asked if the 2018 operational results were a goal for management on the company's Q4 conference call, CEO Andy Jassy stated that with further efficiency improvements, it can exceed those levels in 2024 or 2025.
That's great news for investors, and it shows Amazon's profits should only improve in the coming months.
This is why I'm not concerned about the stock's rise in 2023 or 2024, because there is still plenty of growth available and efficiencies to be had. But if the shares are too expensive, it doesn't make sense to buy even with the improvements.
Amazon's stock is fairly valued
Because Amazon is still working toward maximum profitability, the price-to-earnings (P/E) ratio isn't the best valuation metric. Instead, I'll use the price-to-sales (P/S) ratio to assess Amazon's stock.
AMZN PS Ratio data by YCharts
From this viewpoint, it's obvious that Amazon is valued below the levels it traded at from 2018 to 2022. This bodes well for Amazon's stock, because it shows it has room to climb before reaching its average valuation over the past five years.
While I wouldn't consider Amazon a dirt-cheap stock, it is fairly valued, giving investors peace of mind when starting a position.
Amazon's efficiency improvements are paving the way for the company to be wildly successful, making it my top "Magnificent Seven" stock to buy right now.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Keithen Drury has positions in Alphabet, Amazon, Meta Platforms, Shopify, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Shopify, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
