The Magnificent Seven are set to report their quarterly results, with Tesla (TSLA) set to report on Wednesday January 24 after the market close. Satori Fund Founder and Senior Portfolio Manager Daniel Niles joins Yahoo Finance Live to provide insight on his top stock picks are in the Magnificent Seven.

Niles sees growth potential for Amazon’s (AMZN) AWS, but states that investors should focus on “some of the other stuff that’s going on,” such as operating profits and the soon-to-be introduced ad incorporation on Prime Video.

Niles believes that when looking at AI and the Magnificent Seven, investors will have to “differentiate” between AI stocks given the different AI-related offerings that many big tech companies have, insisting “selectivity is key” heading into earnings.

For Meta (META), Niles calls the valuation "compelling," adding that the platform will likely get a boost from election year advertising spending.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Eyek Ntekim

Video Transcript

- All eyes on big tech as the Magnificent Seven stocks gear up to report their latest results with excitement around AI and caution on economic activity. What is the best way to play tech right here? Well, here to discuss is Dan Niles, Satori Fund founder and senior portfolio manager.

Dan, it is great to have you on the show. And I want to dig right in, Dan, to the Magnificent Seven. Because listen, there's a lot of viewers listening right now.

They own these names, Dan. They're trying to figure out what to do with them. And you still see some opportunity, at least with some of those names.

And so I want to dig into some of those picks. And one is Amazon, Dan, which has had a tremendous run. It's up about 60% over the past 12 months.

But you see still better days ahead for Amazon. I'm guessing, Dan, in part, that must be because you look at AWS, the company's profit center. And you must see that accelerating over the next few quarters here.

DANIEL NILES: It's actually not so much driven by AWS. I mean, I think is an important piece because, obviously, so many investors are focused on it. And you saw the growth there slow from about 40% year-over-year growth in the fourth quarter of 2021 to 12% in each of the last two quarters.

And I do see that picking up a few points going forward. Because, obviously, AI is the theme, right? And everybody's trying to deploy it and figure out how to make it work.

But the real driver in my mind is some of the other stuff that's going on. Because if you look at last quarter, they beat operating profits by 40%, 40. And that was driven by the retail margins really starting to expand.

Because don't forget, these guys put in a lot of capacity during COVID. Then as we came out of COVID, demand really slowed down for e-commerce. And so now as they're filling those high overhead distribution hubs and you're getting a ton of margin leverage.

And then on January 29, they're going to start showing ads to all the Prime Video users. And that's 60% operating margin business relative to high single digits for the overall company. So that's going to be massively accretive.

And so when I look at all of that, I can see EPS doubling by 2025 relative to where it is in 2023. And that's why I like the company a lot.

- Dan, I just want to zero in on one thing that you talked about there, which is that this is an AI adjacent or non-AI story when you're talking about Amazon. And I wonder if you broaden that out and look at the Magnificent Seven.

I mean, there's going to be, again, I'm sure during all these earnings calls a lot of AI talk. But that's not how they're making their money right now. And PS they're still making a lot of money from this other stuff, right? So how should investors be thinking about AI and then the rest of these businesses?

DANIEL NILES: Well, you have to remember the Magnificent Seven, it's easy to look at last year and go, wow, they were up 111%. But don't forget, the year before that, the Magnificent Seven were down 46%. So you're exactly right, Julie, in that.

You need to differentiate. And I think this earnings season because all of these stocks had such a huge rally in November and December. And so far at the beginning of this year, you're going to see that start to break apart.

And to some degree, you're seeing that during earnings season already. I mean, it's very early. But Logitech this morning is just getting absolutely destroyed after running up into their earnings.

And so you're going to have to, I think, be very selective this year. That's why Amazon through AWS as Josh asked about, they've got a legitimate AI play there. 1/3 of the outsourced cloud market. That's where a lot of people are deploying to test out their AI capabilities.

We also like Meta quite a bit because the valuation is very compelling. You're talking about a company that's growing about 13% or so this year trading at a 22 PE. And to put that in perspective, the S&P is trading at a 20 PE.

So very small premium. And you've got an election coming up which is going to happen regardless of whether we get a recession or not at the end of this year. And they're using AI to help place ads to monetize those ads better and to recommend videos to you.

And so they're seeing really good engagement there. And so that's why for us, we like those names. You look at an Apple, on the other hand, and you go, wait a minute. I'm supposed to pay almost 30 times for a company that's growing mid-single digits.

I know retail investors love this name. And everybody has an iPhone. So it's very easy to own.

But on a risk reward basis, they've had negative year-over-year revenue growth for quarters. So I think you need to balance out where are you getting paid to take risk in terms of the multiple being low enough and there being enough upside where things can work out. And Apple for its part doesn't have an AI play really.

And hopefully, they'll add that to the phones later this year. But right now, they're not an AI play, but they're being valued by them. So I think selectivity is key going into this earnings season.