Building wealth in the stock market is not complicated. It simply involves holding shares of consistently growing companies over many years. In the last decade, a small group of elite growth stocks became the default choice for investors looking to earn above-average returns. These became known as FAANG stocks, which include the following:
You can make a case for buying all of these stocks. They all have solid competitive advantages and favorable long-term prospects, although some offer more compelling return potential than others.
If you’re looking for the best FAANG stocks to beat the historical 10% return of the S&P 500 index, here are two I’d put my money on.
1. Amazon
Amazon is a large business with $604 billion in trailing-12-month revenue, but the company continues to grow at rates that can support market-beating returns.
Trailing-12-month revenue is up 12% year over year through the company’s second quarter (ended June 30), with the highest rates of growth coming from non-retail services like advertising and cloud computing. While revenue from online stores grew only 6%, Amazon’s efforts to lower costs, improve fulfillment efficiency, and speed up delivery could translate to further share gains in the e-commerce market.
Year to date, Amazon has delivered more than 5 billion units within one day. Faster shipping speed appears to be leading to the desired outcome, which is increasing order frequency, as management reported an acceleration in its everyday essentials business in the second quarter. This shows Amazon strengthening its competitive advantage in retail.
The efficiency gains in fulfillment are also leading to higher profits. Operating income nearly doubled in Q2 to $14.7 billion over the year-ago quarter. There are still plenty of opportunities to reduce costs, including expanding the use of automation and robotics and consolidating multiple orders to one box. The company could expand margins for several years, considering the growth opportunities in lucrative non-retail businesses like Amazon Web Services and advertising.
Analysts expect Amazon’s earnings to grow at an annualized rate of 22% in the coming years. Even allowing for a lower price-to-earnings (P/E) ratio over the next six years, Amazon investors could potentially double their money by 2030 and beat the S&P 500.
2. Netflix
Netflix has grown into a large entertainment business over the last decade with 277 million subscribers. But this doesn’t mean its return potential is over. The company is still growing revenue at double-digit rates and opportunities to grow profits by expanding margins make it a great stock to hold for the next six years.
Netflix turned in stellar results in Q2 (ended June 30), with revenue and global paid memberships up nearly 17% year over year. The company continues to see a positive impact on subscriber growth from paid sharing, which is putting an end to password sharing among members and boosting revenue.
Netflix already earns industry-leading margins in entertainment, with an operating margin of 27% in Q2. Management is committed to increasing margins every year, but considering it’s very early in scaling its advertising business, there is a long runway of opportunity to grow profits.
Moreover, Netflix still has an attractive revenue growth opportunity. There are more than 1 billion broadband users worldwide, and more than 5 billion basic internet users. Netflix still has a small share of connected TV penetration, which could provide years of gradual growth in subscribers globally.
All told, Netflix can deliver solid growth for many years. Analysts expect Netflix’s earnings to grow 27% on an annualized basis, yet the stock trades at a forward P/E of 31 on 2025 earnings estimates — a reasonable valuation for this much earnings potential. Investors can expect Netflix stock to climb along with earnings, which should easily lead to market-beating returns through 2030.
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.
2 FAANG Stocks That Could Crush the S&P 500 Through 2030 was originally published by The Motley Fool
Source: finance.yahoo.com