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2 Growth Stocks You Can Buy and Hold Forever

By Trevor Jennewine – Sep 1, 2021 at 7:15AM

Key Points

  • Every investor should aim to buy and hold high-quality stocks.
  • Amazon has established itself as a leader in e-commerce and cloud computing.
  • Square makes the economy more accessible for buyers and sellers.

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It's always a good time to add these growth stocks to your portfolio.

In Warren Buffett's 1988 letter to shareholders, the investing veteran said that, under the right conditions, his favorite holding period was "forever." That's because long-term investing is a more reliable path to wealth than strategies like day trading or market timing.

Of course, sticking to this philosophy is easier said than done. But if you buy high-quality stocks and hold them for decades, compounding can multiply your original investment fivefold, tenfold, or even 100-fold. You also save yourself a lot of work by not dipping in and out of the market, and you avoid the burden of paying taxes on short-term capital gains.

With that in mind, I plan to hold Amazon (AMZN -1.44%) and Square (SQ -1.43%) forever. Here's why.

Investor sitting at her computer, reviewing financial news.

Image source: Getty Images.

1. Amazon

Amazon has attained incredible scale. It's the third-largest company in the world, and the largest e-commerce marketplace in North America. According to eMarketer, Amazon will capture 40.4% of U.S. online retail spending this year, while the next nine competitors combined will take 26.5% market share.

What's its secret? Amazon doubled down on its first-mover's advantage, spending billions to build out its logistics business over the past decade. Today, that network comprises hundreds of fulfillment centers and sorting stations, tens of thousands of trucks, and over 150,000 last-mile delivery drivers. This infrastructure allows Amazon to provide fulfillment services for merchants, and it helps the company control shipping costs. Ultimately, the end result is faster deliveries for buyers and less work for sellers.

But Amazon has another advantage: The company's cloud computing business, Amazon Web Services (AWS), is the industry leader by a wide margin, and it's a cash flow machine. During the second quarter, AWS achieved an operating margin of 31%, far higher than the 5% operating margin of its retail business. And because AWS is growing so quickly, Amazon is becoming more profitable over time.

Not surprisingly, the company has turned in a strong financial performance in recent years.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$208.1 billion

$443.3 billion

29%

Operating margin

3.6%

6.6%

N/A

Source: Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Don't let Amazon's size dissuade you. This company still has plenty of room to expand. According to eMarketer, online retail spending will grow at 12% per year between 2020 and 2025, reaching $7.4 trillion. And analysts from Gartner believe the cloud computing market will grow at 21% per year through 2022. I don't expect those trends to change anytime soon.

Here's the bottom line: Amazon has established itself as the leader in two high-growth industries, and the company's scale creates a virtually unassailable moat. That's why I plan to hold this growth stock forever.

2. Square

Square's mission is to help everyone participate in the economy. That may sound odd, but the services some people take for granted may be inaccessible for others, either because they are too costly or too complex. For example, small businesses typically don't have IT teams to maintain backend services like payment processing for e-commerce websites.

To solve that problem, Square provides self-service financial tools for both merchants and consumers, empowering people on both sides of the transaction. These products are divided into two ecosystems.

The Seller ecosystem integrates hardware, software, and services, helping small businesses accept payments, manage labor, and build customer relationships. More importantly, this platform allows sellers to operate seamlessly between physical locations with digital storefronts. As a result, larger merchants are turning to Square more frequently; this cohort comprised 65% of gross payment volume in Q2 2021, up from 55% in Q2 2019.

Likewise, the Cash App ecosystem helps consumers send, spend, and invest their money. And with the recent acquisition of Afterpay, Square plans to use the Cash App as a commerce discovery tool, allowing buyers to find businesses that offer buy now, pay later services at the checkout. In general, the company's simplified approach to finance has been a powerful growth driver, and the Cash App now has 40 million monthly active users.

Collectively, Square has delivered an impressive financial performance over the past three years, demonstrating its value proposition to both merchants and consumers.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Gross profit

$2.7 billion

$15.9 billion

81%

Free cash flow

$71.2 million

$682.8 million

112%

Source: Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Here's the bottom line: Square helps people participate in the economy, and management is executing on a strong growth strategy. The recent acquisition of Afterpay and the launch of Square Banking -- which provides merchants with access to savings and checking accounts -- should drive engagement in both the Seller and Cash App ecosystems. That's why I plan to hold this growth stock forever.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine owns shares of Amazon and Square. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Amazon, and Square. The Motley Fool recommends Gartner and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Amazon.com Stock Quote
Amazon.com
AMZN
$94.13 (-1.44%) $-1.37
Block Stock Quote
Block
SQ
$68.18 (-1.43%) $0.99

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

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