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Forget GameStop and AMC, These 2 Growth Stocks Will Deliver Superior Returns

By Parkev Tatevosian - Feb 8, 2021 at 7:07AM

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The price action in GameStop and AMC stock is exciting, no doubt. However, these two growth stocks will outperform them in the long run.

GameStop (GME 29.19%) and AMC Entertainment Holdings (AMC 14.34%) have garnered a lot of attention from investors lately for being part of an epic short squeeze. Stocks of both AMC and GameStop are experiencing extreme volatility as traders, speculators, and short-sellers collide in the marketplace. 

Investors, however, need not be concerned with the sideshow that's taking place. Instead of taking part in the speculative frenzy in shares of AMC and GameStop, buying shares of Amazon (AMZN 2.57%) and Netflix (NFLX 4.15%) will deliver superior returns over the long run. 

A man sitting in front of a laptop with a pen and pad.

GameStop and AMC shares are experiencing heavy volatility. Image source: Getty Images.

1. Netflix

Netflix was already acquiring customers at a rapid rate, and the pandemic put fuel in the fire. Millions of people are relegated to spending a lot more time at home than they are used to, leading to a substantial increase in demand for in-home entertainment. As a result, Netflix is delivering and reaping the benefits. 

On Jan. 19, Netflix reported having 203 million paying subscribers, up from 167 million the previous year. The entertainment giant is generating an average revenue per user of $11.02. At an annualized rate, that brings in nearly $27 billion in revenue. The sheer size of its member base allows Netflix to spend heavily on content -- further differentiating itself from competitors. In turn, new content should attract new members while also keeping current members on board. The positive feedback loop will be a difficult force to stop, which will provide a sustainable benefit to shareholders.

Moreover, the scale it has reached ensures that it doesn't need to rely on external financing henceforth -- making it a less risky stock

The Netflix app main screen

Image source: Netflix.

2. Amazon 

Amazon just reported its first-ever $100 billion revenue quarter, blowing pastexpectations, and there are no signs of it slowing down. The coronavirus pandemic has pushed millions of people to increase the proportion of shopping they do online. That benefited Amazon, as it was ready to deliver products ranging from toothbrushes to laptop computers. Undoubtedly, some portion of that newly acquired shopping will stick around long after the pandemic.

Amazon's fast shipping, best-in-class customer service, and vast availability of products mean it's hard to find a better alternative e-commerce service. The value proposition becomes even better for Prime members, who get free two-day shipping and access to Prime Video -- all for less than the price of a Netflix subscription. It's no wonder that Amazon has signed up at least 150 million members as of January 2020.

While the Seattle-based company's e-commerce operations drive revenue, the massive profit growth is led by its Amazon Web Services (AWS) segment. In the last 12 months, operating cash flow increased by 72% to $66.1 billion. AWS, which offers cloud computing, storage, and database services, made up 59% of operating profits in 2020 while making up only 12% of sales.

All in all, Amazon is well known for making large investments to increase its capabilities and focus on consumer experience, rather than competiton. Those investments are bearing fruit. What's more, they appear to be expanding. Over the last decade, its gross profit margin more than doubled from 12.9% to 26.6%. 

What this could mean for investors 

The frenzied buying and selling of GameStop and AMC shares is certainly exciting and makes for good headlines. However, long-term investors are not in it for the excitement or the thrill of making a quick profit. Amazon and Netflix are clearly better companies that will provide better returns for the prudent investor. Each has over 150 million loyal customers and growing and continues to provide products and services that keep them coming back. And despite both companies performing excellently since July, their shares are trading at valuations at or below July levels. For those reasons, it's better to forget GameStop and AMC and buy Amazon and Netflix instead.  

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$115.17 (29.19%) $26.02
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$187.83 (4.15%) $7.49
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,135.50 (2.57%) $53.50
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$11.88 (14.34%) $1.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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