You don’t have to invest in unproven stocks to beat the market.
It’s a great time to be putting money to work in the stock market. The S&P 500 has soared nearly 33% over the last 12 months, but it’s most encouraging that some of the strongest companies in the world are still trading at reasonable valuations that set up market-beating return potential.
For example, Amazon (AMZN 6.19%) and Alphabet (GOOGL 0.10%) (GOOG -0.02%) stocks are trading at forward price-to-earnings (P/E) ratios of 39 and 22, respectively, which are typical valuations 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 Amazon and Alphabet should always be an investor’s go-to choice. If these companies can grow at above-average rates, there’s no reason to invest your hard-earned money in risky stocks to earn superior returns.
If you have some extra cash you don’t need for paying debt or other expenses, you might want to consider putting toward these two no-brainer stock investments right now.
1. Amazon
Amazon has grown into a very large business. Over the last year, it generated $620 billion in revenue, including sales from online retail, subscriptions, advertising, and cloud services. However, the company continues to defy the law of large numbers and deliver excellent returns to investors. The stock has doubled over the last five years.
Don’t let Amazon’s size and $2 trillion market cap fool you — the stock can double again. Here’s why.
Amazon is seeing a drastic improvement in profitability. Management is not leaving any stones unturned as it streamlines inventory placement across its fulfillment center network to reduce delivery costs. While the company won’t report high year-over-year growth in net income or free cash flow every quarter, analysts currently expect earnings per share to grow at an annualized rate of 21% over the next several years.
Importantly, Amazon is lowering costs while expanding the use of artificial intelligence (AI) across the business, which could have a positive effect on its top-line growth. AI tools like Amazon Bedrock are boosting demand for Amazon Web Services, but Amazon is also using AI to enhance the shopping experience in its online store. For example, Amazon recently announced AI Shopping Guides are now available to U.S. customers on Amazon’s mobile app. This follows the recent launch of Rufus, Amazon’s generative AI-powered shopping assistant.
A common theme in these AI shopping features and management’s focus on lowering costs is that they encourage customers to shop more frequently on Amazon. AI makes it easier to find what you’re looking for, and lower costs mean Amazon can sell more items at even lower prices.
These initiatives are widening Amazon’s competitive moat and truly making the company unstoppable. The improving retail margins, in addition to growing profits from non-retail services, can potentially drive enough growth on the bottom line to double the share price within the next five years and outpace the S&P 500 index.
2. Alphabet
Alphabet’s Google is a ubiquitous brand, with millions, if not billions, 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. One of the most powerful tools it has to keep users engaged with its products and earn more ad revenue is AI.
Google Search has rolled out AI Overviews, which is leading to more search queries. More search queries, of course, can lead to more advertising revenue. The company has merged AI Overviews with Lens (Google’s visual search tool), which is offering powerful new ways for users to find information and products online.
Like Amazon, Alphabet is able to invest in AI while controlling costs. Earnings have grown significantly faster than the top line this year, and the Wall Street consensus currently has Alphabet’s earnings growing at an annualized rate of 16% in the coming years.
Moreover, Alphabet is not controlling costs at the expense of investing in the future. The company spent $49 billion in capital expenditures over the last year, which would include data centers and AI infrastructure, but it 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 Google owner is a rock-solid business. The stock’s forward P/E is sitting just under 21, which seems like a bargain for this leader in digital advertising and AI that is expected to grow earnings at double-digit rates over the long term. The shares should deliver a return on par with the company’s underlying earnings growth, which puts Google shares on track to double within five years.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.