This has been a year that'll undoubtedly go down in the record books as of one the most volatile on record. In just a six-month time frame, we watched the widely followed S&P 500 lose more than a third of its value, then gain it all back (and then some).
Though volatility on par with what we witnessed in March can be unnerving, it's ultimately a big-time opportunity for long-term investors to scoop up great companies on the cheap.
But it has its downsides, too. Heightened volatility attracts short-term traders and novice investors who have that get-rich-quick twinkle in their eye. Online investing app Robinhood's member count and leaderboard (i.e., most-held stocks) show that short-sighted retail investors are attempting to dive in and out of this market. Among Robinhood's 100 most-held stocks on the platform, quite a few are downright awful companies and/or penny stocks.
Yet amid the chaos, some calmer heads have prevailed on a platform where the average investor is only 31 years old. Although Wall Street isn't a fan of a number of widely held stocks on the platform, analysts absolutely love following three Robinhood stocks.
Thanks to fractional shares, Amazon's (AMZN -8.43%) more than $3,100 share price is no impediment for new and young investors looking to put their money to work. Amazon is one of the most-held companies on the Robinhood platform, and Wall Street also holds it in high regard. In October, 43 of 47 analysts covering the company put a buy or strong buy rating on the company.
Robinhood members are attracted to Amazon for two reasons. First, Amazon is the dominant force in U.S. online sales. Though estimates vary, Amazon holds about 40% of all online retail market share in the U.S., which is roughly five to six times higher than the next-closest competitor. Having such a gigantic lead over its peers makes Amazon the clear go-to for consumers, and has played a big role in helping the company sign up more than 150 million Prime members worldwide. The Prime membership model is a loyalty hook that keeps Amazon's consumers shopping within the company's ecosystem of goods and services.
Investors are also buying Amazon for its cloud infrastructure segment, Amazon Web Services (AWS). Over the long run, AWS is the unquestioned bigger growth story. With more businesses than ever moving into the cloud, demand for AWS' cloud services should skyrocket. Since cloud margins leave retail and ad-based margins in the dust, AWS is going to be responsible for Amazon's near-tripling in operating cash flow over the next four years, according to Wall Street's consensus estimate.
Keeping with the theme of FAANG stocks, Robinhood investors also fancy Alphabet (GOOGL -2.75%) (GOOG -3.29%), the company behind internet search platform Google and streaming platform YouTube. Alphabet's A Class shares (GOOGL) are among the 100 most-held stocks on Robinhood. Wall Street agrees: out of 43 analysts, 38 rated Alphabet as a buy or a strong buy in October. For those curious, the remaining five analysts rated Alphabet a hold. There are no current underperform or sell ratings on the company.
Why the love for Alphabet? Even though the coronavirus disease 2019 (COVID-19) pandemic did a number on the company's advertising revenue in the second quarter, there's no denying the worldwide dominance of the Google search engine. According to data from Stat Counter GlobalStats, Google's share of online search has vacillated between 91.9% and 93% over the trailing year. It's the clear go-to for search ad placement, which gives the company exceptional ad-pricing power.
Furthermore, Wall Street and investors are amped up about Alphabet's infrastructure cloud service, Google Cloud. Even in the pandemic-impacted second quarter, Google Cloud revenue jumped 43% from the prior-year period and hit $12 billion on an extrapolated annual basis. Since cloud margins are superior to margins derived from ad revenue, Alphabet should also benefit from significant cash flow expansion as Google Cloud accounts for a larger percentage of total sales.
Another brand-name stock that Robinhood investors have wisely added to their portfolios is payment processor Visa (V 0.25%). In October, 35 of the 39 Wall Street analysts covering Visa gave it a strong buy or buy-equivalent rating. Like Alphabet, the remaining four viewed Visa as a hold. Not one Wall Street analyst would recommend investors in Visa head for the exit.
One of the keys to Visa's long-term success has been its avoidance of lending. Some of the company's peers (e.g., American Express and Discover Financial Services) are both payment facilitators and lenders, a combination that allows these businesses to double-dip when the U.S. and/or global economy are expanding, but directly exposes them to credit delinquencies during recessions. Since Visa has no loans to worry about collecting, its profit margin consistently stays at or above 50%.
Visa is also built to thrive during long periods of economic expansion. Recessions and economic contractions are inevitable, but they usually last a year or less; by contrast, expansions often stretch on for years. Since Visa holds the lion's share of credit card network purchase volume in the consumption-driven U.S. market, it's positioned to benefit as the U.S. economy inevitably expands.