Over the very long run, value stocks have outperformed growth stocks, according to a Bank of America/Merrill Lynch report that examined average annual returns between 1926 and 2015. However, this trend has reversed in a big way since the Great Recession ended in 2009.
The Federal Reserve's insistence on keeping lending rates low, along with ongoing quantitative easing measures designed to weigh down long-term bond yields, has allowed fast-growing companies access to abundant cheap capital that they've used to hire, innovate, and even acquire other businesses. This dovish monetary policy won't be changing anytime soon. In other words, growth stocks can still thrive.
As we steam ahead into the warm summer days of August, a trio of growth stocks that've cooled off in recent weeks appear ripe for the picking. These well-known companies have the potential to make investors richer in August, but most importantly well beyond.
Image source: Getty Images.
Amazon
Although the stock market offers no guarantees, one near-guarantee for more than a decade has been to buy the dip in e-commerce giant Amazon (AMZN -2.29%). Amazon took it on the chin last week after reporting its second-quarter operating results and issuing sales growth guidance that didn't impress Wall Street.
As you're probably well aware, Amazon's dominant marketplace has seen a surge in demand over the past 18 months as a result of the coronavirus disease 2019 (COVID-19) pandemic. With people staying home to reduce virus transmission, online orders from consumers and businesses have soared. It was only a matter of time before the reopening of the U.S. and global economies slowed online retail orders to more historic growth levels. It looks as if that's what's happening during the third quarter.
Keep in mind that even with the expectation of slower retail sales growth, Amazon is fully expected to dominate U.S. online retail sales market share in 2021. A report from eMarketer in April projected Amazon for a 40.4% of online sales share in the U.S. this year, which is over 33 percentage points higher than Walmart, the expected No. 2 in U.S. e-commerce sales.
It's equally important to understand that while retail is Amazon's largest revenue driver, it's actually low on the totem pole when it comes to long-term cash flow generation. The company's other sales channels, such as cloud infrastructure platform Amazon Web Services (AWS), subscription services (e.g., Prime), and advertising, represent significantly higher-margin opportunities for Amazon -- and they've shown no signs of slowing down. Sales at AWS jumped 37% year-over-year, with more than $59 billion in annual run-rate revenue. Meanwhile, subscription services and advertising sales catapulted 28% and 83%, respectively, in Q2 2021. In short, Amazon's retail sales could slow, but its operating cash flow growth may continue to accelerate.
For the past 11 years, Wall Street and investors have been perfectly comfortable paying a multiple of 23 to 37 times Amazon's year-end operating cash flow. Based on Wall Street's estimate of $314 in cash flow per share by 2024, Amazon looks to be an absolute steal and may well hit $10,000 a share by mid-decade.
Image source: Getty Images.
JD.com
Another growth stock that can help investors build wealth in August and beyond is China-based online retailer JD.com (JD 1.08%).
JD, along with most China-based stocks, have been under heavy selling pressure in recent weeks as Chinese regulators have issued new rules on select industries and stocks listed on U.S. exchanges. This includes Chinese for-profit education stocks, which will be required to adopt a not-for-profit operating model.
The good news for JD is that its predominantly e-commerce-based operating model looks to be mostly safe from any of China's alleged crackdowns. That's because China's No. 2 online retailer is modeled after Amazon. Whereas Alibaba, the clear-cut No. 1 online retailer in China, acts as a marketplace middleman for online orders, the vast majority of JD's revenue come from the direct sale of retail products to consumers online. While it does generate some revenue from third-party sales, the ability to control its own inventory and logistics gives JD more autonomy than Alibaba.
It's worth pointing out that, with the exception of the pandemic, China has consistently been growing its gross domestic product by 6% or more annually for decades. A burgeoning middle class looking for luxuries and convenience are increasingly likely to turn to online retail as a means to buy discretionary and non-discretionary goods. For added context, JD ended March with just shy of 500 million annual active customers.
Just as exciting is JD's push beyond lower-margin online retail and into a variety of services, such as cloud, healthcare, and advertising. Cloud is a particularly attractive opportunity given its substantially higher margins than any of JD's other revenue-generating channels. During the first quarter, JD's services segment accounted for only 14% of total sales, but revenue growth in this segment skyrocketed 73%. Services will be JD's ticket to a substantially stronger operating performance.
With sustainable double-digit growth and a very reasonable forward price-to-earnings ratio of 30, JD's recent decline is the perfect opportunity for growth investors to pounce.
Image source: Pinterest.
To round out this list of growth stocks that can make you richer in August and beyond, and to keep the focus on e-commerce going, I offer up social media up-and-comer Pinterest (PINS -0.18%).
Just like Amazon, Pinterest was clobbered following the release of its second-quarter operating results. Pinterest finished June with 454 million global monthly active users (MAUs), which was up 9% from the prior-year period, but actually declined by 24 million from the sequential first quarter. On a year-over-year basis, international MAUs rose 13%, while U.S. MAUs declined by 5%.
Furthermore, Pinterest's third-quarter guidance (or lack thereof) added to the uncertainty. As of July 27, the company noted that U.S. MAUs fell 7% and global MAUs were up 5%, from the prior-year period.
While there's no sugarcoating the sequential decline in global MAUs, Pinterest was never going to be able to keep up the 37% global net MAU growth experienced in 2020. With the U.S. and global economy reopening, it's only natural to expect folks to get out of their homes more often, at least for a short period of time. Yet even with this sequential decline, Pinterest's MAU growth trajectory has increased steadily since the end of 2016.
What's far more important for Pinterest is that the monetization of its global MAU base continues to move in the right direction. Despite only 9% net global MAU growth in Q2 2021, Pinterest's international average revenue per user (ARPU) catapulted higher by 163% to $0.36, while U.S. ARPU jumped 103% to $5.08. On a global scale, ARPU rose 89% to $1.32. This shows that advertisers are lining up to get their message in front of Pinterest's large audience, which bodes well for Pinterest's revenue and cash flow growth.
Another thing to consider is that Pinterest arguably has the most-targeted user base in all of social media. These are folks that willingly post about the products, services, and places that interest them, making its MAUs the perfect targets for small-and-medium-sized merchants that specialize in these interests.
Long story short, Pinterest's near-term pain is long-term investors' opportunity to scoop up a rapidly growing business at a discount.
