Nasdaq Correction: 1 ‘Magnificent Seven’ Stock to Buy Now and Another to Avoid

Recession fears resurfaced last week when a disappointing jobs report raised questions about whether the Federal Reserve waited too long to cut interest rates. That pushed Nasdaq Composite (^IXIC 1.03%) in a correction zone, meaning the technology stock index is down at least 10% from its record high.

Shares of the Magnificent Seven companies saw double-digit declines, although some were hit harder than others. Amazon (AMZN 0.56%) fell 20% from its peak, while Apple (AAPL -0.97%) fell just 11%. In both cases, investors may be tempted to buy during downturns, but not every pullback is a buying opportunity.

Amazon stock is currently trading at a reasonable price, but Apple stock still looks expensive. Here are the important details.

Amazon: Magnificent Seven stocks worth buying now

Amazon has a strong presence in three major markets. It has the most popular e-commerce marketplace, measured by monthly visitors. It is the third-largest advertising company in the U.S., and eMarketer says Amazon could take second place Meta Platforms by the end of the decade. Finally, Amazon Web Services is a market leader in cloud infrastructure and platform services, meaning it is ideally positioned to monetize artificial intelligence (AI).

Amazon reported mixed financial results for the second quarter. Revenue rose 10% to $148 billion, missing the $148.6 billion Wall Street had forecast. However, GAAP net income rose 94% to $1.26 per share, topping the $1.03 per share analysts had predicted.

Unfortunately, management also gave somewhat disappointing guidance. The company expects operating income to grow 18% in the third quarter, while analysts were expecting a 37% increase. That shortfall has contributed to the stock’s recent decline, but it creates an opportunity for patient investors.

Amazon still has strong growth prospects in e-commerce, digital advertising and cloud computing. E-commerce retail sales and digital ad spending are expected to grow at annual rates of 8% and 10%, respectively, through 2027, according to eMarketer. Meanwhile, public cloud revenue is expected to grow 19% annually through 2028, according to IDC. That gives Amazon a good shot at double-digit sales growth in the coming years, which should translate into slightly faster profit growth as the company continues to optimize operating costs.

Indeed, Wall Street is expecting earnings per share to grow 23% annually through 2027. That makes the current valuation of 38.5 times earnings seem reasonable. I say that because those numbers result in a PEG ratio of 1.7, a significant discount to the three-year average of 2.9. Patient investors should feel confident buying a small position in Amazon today.

Apple: The Magnificent Seven stock is best avoided now

Apple divides its business into two revenue streams: products and services. The former includes revenue from consumer electronics devices, such as iPhones, iPads, and Macs, while the latter includes revenue from the App Store, Apple Pay, iCloud, and subscription offerings, such as Apple TV+ and Apple Music. The company has a strong presence in several of these markets.

Apple consistently ranks second and fourth in quarterly smartphone and personal computer (PC) shipments. It operates the leading mobile app store, as measured by sales, and has parlayed that leadership into a growing advertising business.

Additionally, Apple Pay is the leading in-store mobile wallet among U.S. consumers, and Apple TV+ recently overtook Paramount GlobalParamount+ is the sixth most popular streaming service in the U.S.

But Apple is also beset by headwinds. The recently passed Digital Markets Act could dent the App Store’s dominance in Europe by forcing the company to support third-party app stores. Apple is also losing smartphone market share to local competitors in China. Regional iPhone shipments fell 3% in the second quarter, despite a pick-up in the broader market. That’s concerning because China accounted for 19% of Apple’s revenue last year.

Finally, Apple doesn’t have a clear strategy when it comes to AI. It plans to launch Apple Intelligence in October, bringing AI features to iPhones and MacBooks. But those features are free, and beyond potentially driving product improvements, executives haven’t yet detailed plans for future monetization. Bloomberg has speculated that Apple will eventually start charging for some AI features, but whether consumers will pay is another question.

Apple reported modest financial results in the June quarter. Revenue rose 4.8% to $85.8 billion, and GAAP net income rose 7.6% to $21.4 billion. Active devices reached record levels across all products and geographies, services revenue rose 14% to a record $24.2 billion, and gross margin increased 180 basis points. In short, Apple is successfully attracting consumers to its hardware ecosystem and monetizing them with high-margin services.

The problem is valuation. Apple shares are currently trading at 31.8 times earnings, a premium to the three-year average of 27.8 times earnings. That price seems especially expensive given that Wall Street expects Apple to grow earnings per share by 9% annually over the next three years.

This high valuation may explain why Warren Buffett lowered Berkshire Hathawayshares in Apple in recent quarters. Investors should avoid this stock now.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook 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, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Trevor Jennewine holds positions in Amazon. The Motley Fool holds positions in and recommends Amazon, Apple, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.