At the end of 2020, the Nasdaq 100 -- an index of the 100 largest non-financial companies listed on the Nasdaq exchange -- was sporting a cyclically adjusted price-to-earnings (CAPE) ratio of 55.3, which is well above its historic norm. The same could be said for the benchmark S&P 500, whose Shiller price-to-earnings ratio (another name for the CAPE ratio) hit its second-highest reading ever.
It's not just valuation that's a concern, either. A September Harris poll found that 43% of retail investors are utilizing some form of leverage (either buying equities on margin and/or purchasing options contracts). Leverage can be wonderful when equities are moving in the right direction, but retail investors attempting to time the market has never worked out over the long term. If a margin call wave were to hit retail investors, the Nasdaq could be swept up in the downside frenzy.
On the bright side, every stock market crash in history has eventually proved to be a buying opportunity for long-term investors. If the Nasdaq were to crash, the following four growth stocks would become screaming buys.
Let me preface this by saying that high-growth companies don't need to be listed on the Nasdaq exchange in order to be dragged down in unison. Should a Nasdaq crash gather stream, it would represent an excellent opportunity to buy into data-mining company Palantir Technologies (NYSE:PLTR), which calls the New York Stock Exchange home.
Palantir is a two-pronged beast, with data-mining and analytics platforms built for the government and enterprises. At the moment, Palantir's Gotham platform, which is focused on government contracts, has been its biggest growth driver. Significant wins during one of the toughest years on record in decades helped to drive total sales for the company up 47% in 2020. Plus, it doesn't hurt when more than half of your revenue is derived from a client that always pays its bills.
However, Palantir's more impressive long-term growth driver is likely to be Foundry, which focuses on providing actionable analytics to businesses. When the company filed its S-1 in August prior to its direct listing in late September, it only had 125 customers. In other words, it's really just scratching the surface among Fortune 500 companies.
This dual approach could allow Palantir to continue growing sales by 30% or more annually through at least mid-decade.
If the Nasdaq were to plunge, Fastly (NYSE:FSLY) would be another screaming buy. Fastly is responsible for expediting the delivery of content to end users in a secure manner.
If you thought 2020 was an aberration for online- and cloud-focused companies, you're wrong. A growing number of businesses were establishing a presence online before the pandemic struck. Nowadays, people expect the convenience of instant access to content online. That means an ever-growing demand for the edge-cloud computing services offered by Fastly.
Not to go overboard in the cliché department, but the proof is in the pudding. Fastly ended 2020 with a 99% revenue retention rate, and it delivered dollar-based net expansion rates of 147% and 143% in the third and fourth quarters. What this implies is that most of its big-dollar clients are sticking with its services, and they're spending considerably more than they did in the prior-year period. In other words, Fastly isn't having any issue scaling with its enterprise clients.
In terms of growth, Fastly could be one of the most impressive companies this decade. Wall Street expects sales to triple over the next four years, with the edge cloud market growing by a double-digit percentage throughout the decade.
A stock market crash is also the perfect time to beat the drum on surgically assisted robotic systems developer Intuitive Surgical (NASDAQ:ISRG).
One of the easiest ways for long-term investors to make money (aside from simply being patient) is to buy into businesses with sustainable competitive advantages. Intuitive Surgical has no problem fitting the mold of that definition. That's because its nearly 6,000 installed da Vinci systems is far more than all of its competitors, combined. The rapport this company has built with hospitals and surgical centers, along with the cost of its system ($0.5 million-$2.5 million) and the surgical training provided, makes it highly unlikely that any of Intuitive Surgical's customers would ever leave for a competing platform.
What's more, Intuitive Surgical's operating model is designed to encourage margin expansion over time. Whereas the sale of its pricey surgical systems accounted for the majority of its revenue in the 2000s, the lion's share of its revenue today is derived from the sale of high-margin instruments and accessories with each procedure, as well as from servicing its systems. The higher the number of installed systems goes, the juicier the company's operating margins should be.
Considering that da Vinci has plenty of opportunity to gobble up thoracic, colorectal, and general soft tissue surgical share, investors should expect low double-digit growth for the foreseeable future.
Is there ever a bad time to buy Amazon (NASDAQ:AMZN)? Hint: The answer is no. But if the market crashes, take the gift and add shares to your portfolio at a discount.
As most folks are probably aware, Amazon is the leading e-commerce destination for Americans. According to a March 2020 report from eMarketer, Amazon's share of U.S. online sales should expand another 100 basis points in 2021 to just shy of 40%. For some context here, the next-closest competitor is in the neighborhood of 33 percentage points behind Amazon.
I know what you might be thinking, and you're right: retail margins are generally razor thin. However, Amazon's incredible success with its marketplace has allowed the company to lure in more than 150 million worldwide Prime subscribers. The fees Amazon collects from Prime help it to undercut brick-and-mortar competitors on price. Also, purchasing a subscription with Amazon tends to coerce consumers to spend more annually and stay within the Amazon umbrella of products and services.
Amazon's long-term growth is likely tied to the success of cloud infrastructure service, Amazon Web Services (AWS). AWS grew sales by 30% in 2020 and now sports an annual run-rate of $51 billion. Even though AWS didn't even account for an eighth of total sales last year, it generated more than half of the company's operating income. With truly superior margins to retail, AWS is Amazon's key to skyrocketing cash flow.