Building wealth in the stock market is not complicated. It’s simply about holding shares of consistently growing companies over many years. Over the past decade, a small group of elite growth stocks have become the default choice for investors looking to earn above-average returns. These became known as FAANG stocks, including the following:
You can make a case for buying all of these stocks. All have solid competitive advantages and favorable long-term prospects, although some offer more attractive return potential than others.
If you are looking for the best FAANG stocks that have the historical return of 10% of the S&P500 index, here are two I would put my money on.
1. Amazon
Amazon is a big company with $604 billion in revenue over the last twelve months, but the company continues to grow at a pace that can support market-beating returns.
Trailing-twelve-month revenue rose 12% year-on-year in the company’s second quarter (ended June 30), with the highest growth rates coming from non-retail services such as advertising and cloud computing. While online store sales grew only 6%, Amazon’s efforts to reduce costs, improve fulfillment efficiency and speed up delivery could translate into further share gains in the e-commerce market.
To date, Amazon has delivered more than 5 billion units in one day. Increased shipping speed appears to be leading to the desired outcome of increasing order frequency, as management reported an acceleration in daily necessities in the second quarter. This shows that Amazon is strengthening its competitive advantage in retail.
The efficiency gains in fulfillment also lead to higher profits. Operating income nearly doubled to $14.7 billion in the second quarter compared to the previous year’s quarter. There are still plenty of opportunities to reduce costs, including expanding the use of automation and robotics and consolidating multiple orders into one box. The company could expand its margins for several years, given growth opportunities in lucrative non-retail businesses such as Amazon Web Services and advertising.
Analysts expect Amazon’s profits to grow 22% annually in the coming years. Even factoring in a lower price-to-earnings ratio over the next six years, Amazon investors could potentially double their money and beat the S&P 500 by 2030.
2.Netflix
Netflix has grown into a major entertainment company over the past decade with 277 million subscribers. But this doesn’t mean the return potential is over. The company’s revenue is still growing at double-digit rates and its potential to grow profits by expanding margins makes it an excellent stock to hold for the next six years.
Netflix posted strong results in the second quarter (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 ends password sharing among members and increases revenue.
Netflix is already achieving industry-leading margins in entertainment, with an operating margin of 27% in the second quarter. Management aims to increase margins every year, but since it is very early in scaling its advertising business, there is still a long way to go to grow profits.
Moreover, Netflix still has an attractive revenue growth opportunity. There are more than 1 billion broadband users and more than 5 billion basic internet users worldwide. Netflix still has a small share of connected TV penetration, which could mean years of gradual global subscriber growth.
All told, Netflix can deliver solid growth for years to come. Analysts expect Netflix’s profits to grow 27% year-over-year, yet the stock trades at a price-to-earnings ratio of 31 to 2025 earnings estimates – a reasonable valuation for this large earnings potential. Investors can expect Netflix’s stock to rise along with its earnings, which should easily lead to market-beating returns through 2030.
Should You Invest $1,000 in Amazon 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, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms and Netflix. The Motley Fool has a disclosure policy.
Two FAANG stocks that could crush the S&P 500 through 2030 were originally published by The Motley Fool
