Time to Invest in the Market’s Hidden Gems
The stock market has seen a remarkable surge, with the S&P 500 rising by nearly 33% over the past 12 months. What’s even more encouraging is that some of the world’s strongest companies are still trading at reasonable valuations, setting them up for market-beating returns.
Growth Stocks with a Twist
Companies like Amazon and Alphabet are trading at forward price-to-earnings ratios of 39 and 22, respectively, which is typical for growth stocks. However, these companies are expected to grow earnings at significantly higher annual rates than the S&P 500’s historical average of 10%. Investing in dominant businesses like these should always be an investor’s go-to choice.
Amazon: The Giant with Room to Grow
Amazon has grown into a massive business, generating $620 billion in revenue over the last year from online retail, subscriptions, advertising, and cloud services. Despite its size, the company continues to defy expectations and deliver excellent returns to investors. The stock has doubled over the last five years, and there’s no reason why it can’t double again. Amazon is seeing a drastic improvement in profitability, with management streamlining inventory placement to reduce delivery costs. Analysts expect earnings per share to grow at an annualized rate of 21% over the next several years.
The Power of Artificial Intelligence
Amazon is leveraging artificial intelligence (AI) across its business, which could have a positive effect on its top-line growth. AI tools like Amazon Bedrock are boosting demand for Amazon Web Services, and the company is using AI to enhance the shopping experience in its online store. This focus on AI is widening Amazon’s competitive moat and making the company unstoppable.
Alphabet: The Ubiquitous Brand
Alphabet’s Google is a household name, with millions of people using products like Gmail, Chrome, Android, YouTube, and Google Search. The company has a world-class advertising service that monetizes these products, helping grow Alphabet’s total revenue to $339 billion over the last year. Google has been growing revenue at strong double-digit rates thanks to a healthy digital advertising market. AI is also playing a key role in Google’s success, with AI Overviews leading to more search queries and advertising revenue.
A Rock-Solid Business
Alphabet is able to invest in AI while controlling costs, with earnings growing significantly faster than the top line this year. The company spent $49 billion in capital expenditures over the last year, but still generated $55 billion in free cash flow. Alphabet is drowning in cash, with $93 billion in cash and marketable securities and just $12 billion in long-term debt on its balance sheet. The stock’s forward P/E is sitting just under 21, which seems like a bargain for this leader in digital advertising and AI.
The Bottom Line
Both Amazon and Alphabet have the potential to outperform the S&P 500 through 2030. With their strong track records, dominant market positions, and focus on AI, these companies are set up for long-term success. If you have some extra cash, consider putting it towards these two no-brainer stock investments right now.
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