1 “Magnificent Seven” stock that could turn parabolic if the Fed cuts rates in September

“The Magnificent Seven” is a name used to collectively describe the world’s largest technology businesses — Apple, Microsoft, Nvidia, Alphabet, Amazon (AMZN 3.71%), Metaand adze.

An interesting feature of the Magnificent Seven is that each business is so diverse and spans so many different end markets that this cohort of megacaps can shed a lot of light on the overall health of the economy.

Investors know that two prominent themes of the macro environment over the past two years have been persistent inflation and high interest rates. But just days ago at the Economic Policy Symposium in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell said, “The time has come for policy to adjust.”

It seems to me that the interest rate would be reduced. If the Fed starts cutting rates, I think there’s a good argument to be made that each of the Magnificent Seven stocks will continue to climb.

However, I see Amazon as the candidate with the most upside. Let’s examine how changes in monetary policy could supercharge Amazon and assess why now looks like a profitable opportunity to buy the stock.

A new spark for e-commerce

Amazon’s biggest 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.

Data Source: Investor Relations.

Do you notice any patterns? Growth over the past year among brick-and-mortar stores, commissions from third-party sellers and subscriptions like Amazon Prime have slowed. While online sales improved modestly, quarterly results were quite inconsistent.

However, this should not come as a surprise. Although inflation has cooled dramatically in 2023, inflation still persists. Goods and services continue to rise in price, just not as fast. When you layer abnormally high inflation with rising interest rates, it’s not entirely surprising to see a slowdown in online shopping and subscription services.

US Inflation Rate Data by YCharts.

If the Fed does introduce a rate cut in September, I think such a move will be very well received. Even a modest reduction in borrowing costs can go a long way for consumer purchasing power. I believe the rate cut will serve as a catalyst for Amazon’s e-commerce segment and ignite new growth for the company’s largest business.

Plus, I think Amazon’s e-commerce partnerships with social networks are all the wiser now that rate cuts seem to be looming.

More investment in artificial intelligence (AI)

Even though Amazon’s e-commerce business has faced an uphill battle over the past year, the company has been able to generate growth from other sources. Namely, the Amazon Web Services (AWS) cloud computing platform has been a major beneficiary of the artificial intelligence (AI) revolution.

Similar to my e-commerce thesis, I believe the rate cuts will give corporations of all sizes new financial flexibility. For its part, AWS looks poised for some acceleration as companies continue to increase investment in AI applications.

Image source: Getty Images.

Why Amazon stock looks poised to thrive right now

For the 12 months ended June 30, Amazon generated $53 billion in free cash flow — up 572% year over year. Considering Amazon’s total revenue is only growing 10% year-over-year, it’s incredible to see such a significant increase in profitability metrics.

AMZN market cap data by YCharts.

Over the past 10 years, Amazon’s market capitalization has increased by approximately 1,140%. Over the same time frame, the company’s free cash flow has roughly quadrupled.

Amazon’s current price to free cash flow (P/FCF) ratio is 38.9. By comparison, the company’s 10-year average P/FCF ratio is around 84. This means that Amazon’s stock is technically more reasonably priced today than it was a decade ago, despite evolving into a much larger and more complex enterprise that covers a multitude of new markets. opportunities.

To me, investors are really overlooking Amazon stock right now and not fully understanding how quickly the company can hit new levels of profitability. Amazon has been able to grow free cash flow exponentially even during a period of unpredictable sales growth, but I don’t think the current valuation fully reflects that dynamic.

With plenty of cash on the balance sheet and the possibility of interest rate cuts looming, I think Amazon’s business is about to be supercharged by youthful consumers and corporates alike, and I see now as a great time to load up on the stock.