For Wall Street and investors, this has been a truly unforgettable year. The coronavirus disease 2019 (COVID-19) pandemic has completely changed the way we interact with one another, displaced more than 20 million workers, cost close to 140,000 Americans their lives, and sent the stock market on its wildest ride in history.
Generally speaking, volatility can actually be the friend of long-term investors. That's because periods of panic and heightened volatility allow investors to buy great companies at a discount. Despite 37 previous corrections in the broad-based S&P 500 prior to the COVID-19 bear market, each and every one of these corrections was eventually erased by a bull market rally.
Of course, not all investors are thinking long-term. Online trading platform Robinhood, which is best-known for attracting young and novice investors, has a top-holdings list that seems to fluctuate constantly based on the latest hot trend.
Though Robinhood investors are collectively viewed as engaging in some highly risky investing practices that have historically not turned out well, there are pockets of promise. Over the trailing 30-day period (ended July 18, 2020), Robinhood investors have been buying the following three top-performing growth stocks hand over fist.
The first company catching the eye of investors is e-commerce behemoth Amazon (AMZN -1.10%). Over the past 30 past days, 121,698 net Robinhood members have added Amazon to their portfolios, which is a 48.2% increase from the number of investors who were holding it in the previous 30-day period.
Why Amazon? One reason is that it's a (pardon the apropos pun) prime beneficiary of the COVID-19 pandemic. With consumers forced to stay in their homes or concerned about shopping in crowded stores, Amazon's e-commerce segment has become a big winner.
Then again, Amazon's e-commerce operations were dominating well before the coronavirus upended our societal habits. Analysts at Bank of America/Merrill Lynch estimate that Amazon holds a 44% share of online sales in the United States, with Walmart occupying a very distant second place at 7%. Having this dominant market share is what's allowed Amazon to rack up more than 150 million paying Prime members worldwide, and should be critical to keeping consumers within its ecosystem of products and services.
Amazon also has its not-so-secret weapon: Amazon Web Services (AWS). AWS is the company's cloud infrastructure service that's doubling the growth rate of its core operating segments, and is also responsible for the lion's share of operating income. Since cloud margins are considerably higher than retail and ad revenue, and COVID-19 is coercing businesses to move into the cloud a faster pace than ever before, AWS should be a major cash flow driver for Amazon in the years to come.
The only growth stock that's been even more popular than Amazon over the trailing 30-day period is electric vehicle (EV) manufacturer Tesla (TSLA 2.36%). A net of 181,260 Robinhood investors have added Tesla to their accounts, increasing platform ownership to more than 483,000 members. In fact, Tesla has moved into the top-10 most-held stocks on Robinhood.
One reason Robinhood investors appear to be infatuated with Tesla, other than its amazing rally in recent weeks, is its first-mover advantage in mass-produced EVs. Though the EV landscape is competitive, Tesla is the first auto manufacturer to successfully build itself from the ground up to reach mass production in more than five decades. Investors envision a future where a growing number of vehicles sold are electric, and Tesla, being the true pioneer in that field, should prove to be a significant beneficiary.
Robinhood investors are also probably riding Elon Musk's coattails. Though Elon's commentary can be edgy at times and should occasionally come with a warning, there's no questioning that he's a visionary. He also has quite a bit of skin in the game, with a nearly 21% ownership stake in Tesla's stock. Having the founder remain actively involved in Tesla's future has played a big role in inducing confidence among shareholders.
Personally, I'm not a fan of Tesla, but have been wrong every step of the way, thus far. The EV industry looks to be in a bubble, and all industries, no matter how high growth, need time to mature. Even Tesla, after more than a decade, still runs into operational hiccups and deadline delays. Tesla can absolutely be a long-term success story, but its current valuation is a tough pill to swallow.
Robinhood investors also can't stop buying tech giant Microsoft (MSFT -0.90%). It's the 10th-most-popular add over the trailing 30-day period (62,532 net additions), and has become the seventh-most-held stock on the platform.
Investors' love affair with Microsoft probably has to do with its exceptional margins. Despite the company's legacy operations now growing a slow pace, the dominance of Windows as the premier operating system in PCs continues to generate juicy margins.
But it's not just the margins of Microsoft's legacy operations that continue to rake in the cash flow. We're talking about a company whose innovation is driving sales growth and cash flow. In particular, Microsoft has focused on the software side of cloud applications. Cloud service Azure saw sales soar 61% on a constant currency basis in the quarter ended in March, while Office-, Dynamics-, and Windows-based cloud services all delivered double-digit year-on-year growth (also on a constant currency basis). Similar to how Amazon is boosting its margins by focusing on high-margin cloud services, we should see Microsoft's already robust cash flow romp higher in the years to come.
Yet another selling point for Microsoft is that it might be the safest dividend stock on the planet (yes, growth stocks can be dividend stocks, too). It's one of only two public companies to hold the AAA rating from Standard & Poor's, and ended March with over $53 billion in net cash.
Look for Microsoft to continue delivering low double-digit sales growth for the foreseeable future.