The Nasdaq Composite (NASDAQINDEX: ^IXIC) entered a bull market in December 2022. In the 18 months since, the tech-heavy index has risen 76% amid rising interest in artificial intelligence. But based on historical patterns, those gains are likely just the beginning.
Since 1990, the Nasdaq has returned an average of 215% during bull markets with average durations of about 40 months. If the current bull market accurately matches the historical average, the Nasdaq will rise an additional 139% from its cyclical lows over the next 22 months.
That implies a somewhat unrealistic return of 61% per year. But investors still have good reason to believe that the Nasdaq will rise over time. The index has risen a total of 2,420% over the past two decades, or 11.3% per year. That period has covered such a wide range of economic conditions that it’s reasonable for investors to expect similar returns in the future.
With that broad perspective in mind, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) And Roku (NASDAQ: ROKU) would be worth considering buying now.
1. Alphabet
Alphabet makes most of its revenue from digital advertising and cloud computing. Its Google subsidiary is the world’s largest ad tech company because of its ability to engage internet users and collect data. It has six consumer-facing products and services that each reach 2 billion monthly users, including Google Search, YouTube, Chrome and Android. That reach and the insights it provides are valuable to advertisers. So much so that Google is expected to capture 27.4% of digital ad revenue globally by 2024, according to an Emarketer forecast.
Meanwhile, Google Cloud is the third largest provider of cloud infrastructure and platform services. Google Cloud lags behind Amazon Web services and Microsoft Azure has gained a large share of the market, but the company has grown by one percentage point in the past year. That trend could continue as artificial intelligence (AI) and machine learning (ML) continue to eat up a larger share of IT budgets.
A recent survey of CIOs from Morgan Stanley predicted that Microsoft would be the cloud provider seeing the largest incremental gains in AI/ML workloads over the next three years, but predicted that Google would be the second-biggest beneficiary in the space. That conclusion was supported by the early success of its Gemini multi-modal model, designed to compete with the models powering ChatGPT. Google’s Gemini is currently the second-most popular AI cloud service.
Alphabet showed financial strength in the first quarter, with growth accelerating on both the top and bottom lines. Revenue rose 15% to $80.5 billion on strong momentum in the Google Cloud segment, which also includes Google Workspace office productivity software. Meanwhile, GAAP net income rose 57% to $23.7 billion, a gain helped by disciplined cost management.
Wall Street analysts estimate that Alphabet will grow earnings per share at a compound annual rate of 16% through 2027. That projection makes the current valuation of 28.2x earnings seem reasonable. From that level, I think Alphabet has a good chance of outperforming the Nasdaq over the next three to five years.
2. Roku
Roku connects streaming content publishers and advertisers with consumers. It is the leading streaming video platform in the U.S. by hours streamed, and its Roku OS is the top-selling TV operating system in the U.S. and Mexico. About 40% of smart TVs sold in those countries in the first quarter were Roku TVs.
Additionally, it offers on-demand content and live television via The Roku Channel, an ad-supported streaming service that consistently ranks as one of the most popular channels on the platform. The Roku Channel recently acquired Peacock (owned by Comcast) and Max (owned by Discovery of Warner Bros.) to become the seventh most popular streaming service in the US
Roku reported encouraging financial results in the first quarter. Revenue rose 19% to $882 million, a sequential acceleration from 14% growth in Q4 2023. Meanwhile, adjusted EBITDA improved to $41 million, a big turnaround from the $69 million EBITDA loss in the year-ago period. Investors have good reason to believe the favorable momentum will continue.
Emarketer predicts that U.S. connected TV ad spending will grow at a 13% compound annual rate through 2027. Roku will benefit from that growth due to its superior ability to engage viewers, as evidenced by its leadership position among streaming platforms and the growing popularity of The Roku Channel.
Roku will also benefit from its recently announced partnership with The trading deskthe largest independent ad tech platform for media buyers. Specifically, Roku will share data with advertisers who use The Trade Desk to help them “better understand and optimize their campaigns for TV streaming viewers.” That should make Roku’s ad inventory even more attractive.
Wall Street analysts, on average, expect Roku’s revenue to grow 12% annually through 2027. I think that estimate leaves room for upside surprises, given that the broader connected TV advertising market is expected to grow even faster. But even if Wall Street is right, the stock still seems fairly valued at its current price-to-sales ratio of 2.4, and Roku has a good shot at outperforming the Nasdaq over the next three to five years.
Should You Invest $1,000 in Alphabet Now?
Before you buy Alphabet stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $751,670!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of July 2, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Roku and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Roku, The Trade Desk and Warner Bros. Discovery. The Motley Fool recommends Comcast and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
History Says The Nasdaq Will Rise: 2 Notable Growth Stocks To Buy Now For The Bull Market was originally published by The Motley Fool
