If you want to earn life-changing returns in the stock market, bet on growth stocks. These rapidly expanding companies can transform your portfolio over a long enough time frame. Let's explore the reasons why e-commerce giant Amazon (AMZN -1.59%) and social media upstart Snap (SNAP 1.19%) could make great buys right now.
Amazon's performance has been relatively lackluster in 2021, with shares up by less than 1% year to date. But don't be fooled. The company still offers investors a reliable blue chip brand coupled with solid growth prospects -- an unbeatable combination.
Second-quarter sales grew 27% year over year to $113 billion, powered by strength in Amazon's core North American e-commerce segment, which represents 60% of the total. Some investors were disappointed by this result because it is a deceleration from the 40% expansion posted during pandemic lockdowns this time last year. But Amazon's long-term thesis remains intact as more companies shift data storage and operations to platforms like Amazon's AWS to slash costs and boost efficiency.
Amazon is also working hard to maintain its economic moat in e-commerce and retail. According to The Wall Street Journal, the company plans to supplement its existing network of 29 checkout-free Amazon Go stores with full-blown department stores that could sell everything from clothing to household items. This strategy could help Amazon compete with big-box rivals like Walmart, which currently dominates the space.
With a price-to-earnings multiple of 45, Amazon is more expensive than the S&P 500 average of 34. But the stock still looks like a good deal considering its solid growth rate and track record of industry leadership in e-commerce and cloud computing.
Up 47% year to date, Snapchat parent Snap is outperforming many of its social media peers. The platform's strong niche and expansion into synergistic opportunities like augmented reality could help it maintain the bull run.
Second-quarter revenue soared 116% year over year to $982 million -- trouncing rivals Facebook and Twitter, which grew 56% and 74%, respectively, in the corresponding period. Snap's focus on 13- to 24-year-olds (where it boasts a 90% penetration rate in established markets) is key to its economic moat. Advertisers can use Snapchat to target this lucrative demographic, potentially leading to higher ad rates.
Snap is further bolstering its edge through augmented reality. Management estimates that over 200 million of its 293 million daily active users engage with AR daily. And the company plans to leverage this audience to create an improved online shopping experience, which could include product scanning and virtual try-ons. Strategies like this could help Snapchat grow its average revenue per user, which stands at $10.09 globally as of 2020.
Snap trades for 33 times sales, which isn't cheap. But quality often comes at a premium, and investors are understandably optimistic about the company's ability to maintain healthy growth rates considering its strong moat and massive AR engagement. Management expects third-quarter sales to jump by up to 60% to $1.1 billion with adjusted EBITDA of $100 million to $120 million compared to $56 million in the prior-year period.
What is your strategy?
Amazon and Snap are great picks for investors looking for massive long-term growth, but they suit different investment strategies. As a larger and more established company, Amazon is the safer bet. Snapchat, on the other hand, probably has more runway for expansion. But its lofty valuation could also give it more downside risk.