Cramer Sees 'Magnificent Seven' at Price Point Where Investors Should Take Notice
CNBC's Jim Cramer believes that the 'Magnificent Seven', Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla, are finally at a price point where investors should take notice. He thinks they're cheap compared to the rest of the market, but not all of these companies have clean cases.
According to Cramer, the mechanism behind this undervaluation is straightforward: heavy capital expenditures (capex) depress free cash flow in the short term in exchange for profits later, which markets discount harshly when they doubt them. This can be seen in Meta's recent Q2 earnings, where capex guided $130-145 billion and free cash flow collapsed to $784 million from $8.55 billion a year earlier.
Amazon and Alphabet have the cleanest cases among these companies, Cramer said. Amazon is cheap, and Andy Jassy is willing to wreck its balance sheet like in the old days because he believes they'll make fortunes. AWS grew 37% year-over-year to $42.23 billion, its fastest growth in 18 quarters, with a backlog of $496 billion.
Alphabet trades at a trailing P/E of 17x, against Google Cloud's 82% year-over-year growth. However, Cramer skips the harder question: whether search economics survive AI assistants. His read is that Gemini's 950 million monthly users and enterprise traction suggest Alphabet is capturing substitution rather than losing to it.
Meta, on the other hand, has a legal overhang due to $2.4 billion in legal charges and $1.2 billion in severance from an 8,000-employee reduction. The stock is down 16.88% over the past year. Meta's WhatsApp claim needs interrogation; an asset is only undervalued if there's a credible monetization path.
NVIDIA trades at a forward P/E of 24x after Q2 revenue more than doubled to $96.22 billion, while Tesla has a trailing P/E of 392x and an operating margin of 4.6%. Cramer thinks the Magnificent Seven are finally cheap compared to the rest of the market, but the falsifiable test is capex converting into free cash flow growth beyond revenue growth alone over the next four quarters.