Two Enduring Investment Opportunities in Expanding Companies
The S&P 500 commenced this year on a prosperous note, marking the existence of a bull market, and the fortune has only improved for all three principal indicators since then. The S&P 500, Nasdaq, and Dow Jones Industrial Average have seen a surge of 24%, 26%, and 14% respectively, since January's commencement. The notable performers in this bullish phase have been growth stocks, which typically thrive in such market conditions.
However, investing in these growth stocks solely during a bull market might not be prudent. A robust growth stock has the potential to perform well over an extended period, and this performance may extend beyond a single bull phase. Hence, it is crucial to identify and invest in quality stocks that exhibit promising growth prospects in the long run.
Historical trends suggest that bull markets have a tendency to outlast bear markets, implying that the current bull market may still have room to grow. Investing in growth stocks at this juncture could potentially yield profits in the short term and, if selected wisely, over the long haul as well.
Let's explore two such growth stocks that could be a wise investment for an extended period:
1. Amazon
Amazon (AMZN -0.66%) is perhaps the epitome of a growth company, excelling in two rapidly expanding markets - e-commerce and cloud computing. Amazon is also placing significant emphasis on artificial intelligence (AI), which some believe has the potential to revolutionize the world, much like the telephone or the Internet. Amazon is leveraging AI to enhance its own operations through efficiency gains and offering AI products and services to clients via its cloud computing department, Amazon Web Services (AWS).
This strategy has enabled Amazon to establish a strong earnings record, consistently reporting billions in revenue and profit quarter after quarter. In e-commerce, Amazon boasts a competitive edge due to its extensive delivery network and an appealing subscription program that safeguards customer loyalty. The company is also focusing on delivering products faster and faster, thereby cutting costs and delighting customers.
Cloud computing and AI are mutually reinforcing spheres, with AI contributing to AWS's staggering annual revenue run rate of $110 billion. This is significant since AWS has historically served as Amazon's primary profit generator.
Currently, Amazon is trading for 40x forward earnings estimates. While this may not be an unbeatable deal, it is justifiable given the company's prowess in high-growth sectors and the prospect of its earnings momentum continuing to thrive in the future.
2. Chewy
Chewy (CHWY 1.22%), like Amazon, is an e-commerce company, but it specializes in the pet care sector, providing pet food, toys, prescription medication, and health insurance among other things. Chewy recently expanded its business to include brick-and-mortar veterinary clinics under the name Chewy Vet Care. Additionally, Chewy is also generating revenue through sponsored ads, a relatively new but promising venture.
What particularly appeals to me about Chewy is its customer loyalty program, known as Autoship, which allows clients to automatically reorder frequently-used items at their preferred delivery date. This service has consistently contributed over 75% to total sales quarter after quarter, with this percentage surpassing 78% in the latest quarter. Another promising sign is the net sales per active customer, which increased by 6% to reach a record high of $565 in the most recent quarter.
Chewy's financial health is robust with no debt and a cash reserve of $695 million, along with a focus on managing operational expenses. Moreover, the company anticipates its gross margin, currently at approximately 29%, to expand as higher-margin business segments grow over time.
Presently, Chewy is trading for 25x forward earnings estimates, making it an engaging growth stock to invest in for an extended period.
After observing the potential for growth in the e-commerce sector, investing in quality stocks like Amazon and Chewy could be beneficial. Despite Amazon trading at 40x forward earnings estimates, its dominance in high-growth sectors such as e-commerce and cloud computing justifies this valuation. Similarly, Chewy, specializing in the pet care sector, boasts strong customer loyalty and is trading at 25x forward earnings estimates, making it a promising investment option for an extended period. Effective finance management and strategic growth plans in these companies contribute to their attractive investment opportunities in the field of finance and investing.
