1 ‘Magnificent Seven’ Stock That Could Go Parabolic If Fed Cuts Rates in September

The “Magnificent Seven” is a term used collectively to describe the world’s largest technology companies – Apple, Microsoft, Nvidia, Alphabet, Amazon (AMZN 3.71%), FinishAND Tesla.

An interesting thing about the Magnificent Seven is that each company is so diverse and operates in so many different end markets that this group of large-cap stocks can shed a lot of light on the overall health of the economy.

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

That sounds like a rate cut to me. If the Fed starts cutting rates, I think it would be very likely that the stocks of each of the seven great stocks would continue to rise.

However, I see Amazon as the candidate with the greatest growth potential. Let’s look at 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 revenue source comes from its e-commerce marketplace. The table below illustrates the annual revenue growth trends for Amazon’s online marketplace over the past year.

Data source: Investor Relations.

Notice any patterns? Growth over the past year has slowed across brick-and-mortar stores, third-party merchant commissions, and subscriptions like Amazon Prime. While online sales have improved slightly, quarterly results have been fairly inconsistent.

But that shouldn’t come as a surprise. While inflation fell sharply in 2023, it’s still there. Prices for goods and services are still rising, just not as quickly. When you combine abnormally high inflation with rising interest rates, it’s not surprising that you’re seeing a slowdown in online shopping and subscription services.

US inflation data according to YCharts.

If the Fed does cut rates in September, I think the move will be very well-received. Even a modest reduction in borrowing costs could make a big difference in consumer purchasing power. I think the rate cuts will be a catalyst for Amazon’s e-commerce business and ignite new growth for the company’s largest business.

What’s more, I think Amazon’s partnership with social media giants in the e-commerce space makes more sense now that interest rate cuts seem to be getting closer.

More investment in artificial intelligence (AI)

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

Similar to my e-commerce thesis, I think the interest rate cuts will provide corporations of all sizes with some newfound financial flexibility. AWS, on the other hand, seems poised for some acceleration as companies continue to increase their investments in AI applications.

Why Amazon Stock Now Seems Ready to Rise

In 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 growing just 10% year over year, it’s amazing to see such a significant increase in profitability metrics.

AMZN market capitalization data according to YCharts.

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

Amazon’s current price-to-free cash flow (P/FCF) ratio is 38.9. For comparison, the company’s 10-year average P/FCF ratio is around 84. This means that Amazon shares are technically more reasonably valued today than they were a decade ago, despite evolving into a much larger, complex enterprise encompassing a host of new market opportunities.

In my opinion, investors are really missing the point of Amazon stock and don’t fully understand how quickly the company can reach new levels of profitability. Amazon has managed to grow free cash flow exponentially even during times of unpredictable sales growth, but I don’t think the current valuation fully reflects that momentum.

With plenty of cash in the bank and interest rate cuts coming, I think Amazon’s business will soon be supercharged by resurgent consumers and corporations. I think it’s a great time to buy shares.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former Facebook chief market development officer and spokeswoman and sister of 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. Adam Spatacco holds positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 call options on Microsoft and short January 2026 $405 call options on Microsoft. The Motley Fool has a disclosure policy.