No matter what's going on in the world or the economy, there will always be great companies laying the groundwork to produce future profits for their shareholders. The challenge for investors, of course, is figuring out which ones are best positioned to deliver on those efforts.
To give you some ideas, we asked three Motley Fool contributors to name their top stock picks this month. Here's why they chose Amazon (AMZN -1.25%), Hasbro (HAS 0.79%), and Chegg (CHGG -2.58%).
The e-commerce leader is still investing to meet growing demand
John Ballard (Amazon): One reason Amazon is my top stock to buy now is that it continues to invest billions in expanding capacity to serve its growing customer base, which is a key component of its wide competitive moat. This also shows that management is preparing for greater demand to come. Plus, the stock seems undervalued relative to the amount of cash Amazon generates from operations, which has increased 78% over the last three years to reach $55 billion.
Millions of new customers got sucked into the Prime tractor beam during the pandemic, bringing the loyalty program's membership count to over 200 million at the start of 2021. That, too, is a clear signal of higher profits to come.
Amazon doesn't make a huge amount of profit on its retail sales, but it does generate substantial margins on its fees from third-party sellers, which help the e-tailer offer many items it otherwise wouldn't. Third-party products are popular with its customers -- they represented 56% of total paid units sold in the third quarter. Moreover, revenue from third-party seller services grew 37.5% year over year through the first three quarters of 2021, which is twice the revenue growth rate of Amazon's online stores.
Amazon also generates high margins from selling sponsored ads and offering cloud services through Amazon Web Services, which experienced a reacceleration in growth in the last quarter and produced 12% of Amazon's total revenues.
Higher margins from these non-retail categories sent Amazon's free cash flow to a record $25.9 billion in 2020. The stock currently trades at 33 times its cash from operations, which is the same multiple investors were paying for Amazon nearly 10 years ago before the stock's epic run. I would consider buying shares before more investors realize what they are missing with this top growth stock.
Hasbro's not just the toy company you remember
Jennifer Saibil (Hasbro): When you think of exciting stocks, Hasbro might not be the first name that comes to mind. The toy company, which owns classic board games like Monopoly, as well as popular kids brands such as Transformers and My Little Pony, has been around for nearly 100 years. But Hasbro is evolving to adapt to the current moment, and harnessing the power of digital to solidify its position in games and gaming.
Its business tanked earlier in the pandemic, but it has come back strong. Hasbro posted an 11% sales increase year over year in 2021's third quarter. Leading the way was its entertainment division, with a 76% revenue increase. CEO Brian Goldner passed away recently, but his vision of creating strong entertainment brands that combine a full experience of digital content with products still guides the organization. For example, Hasbro released a new My Little Pony animated film on Netflix that it produced in conjunction with the creatives from eOne, which it acquired in 2019. It supported the movie's success with a dedicated Amazon shop, and it has launched many supporting games and products to round out stories and TV show-based brands such as Peppa Pig and PJ Masks.
Like many other companies, Hasbro is facing supply chain problems; $100 million worth of demand was not met in the third quarter. But the company found alternative supply methods, and most of what had been delayed has already been shipped in Q4. What's in the company's favor is the focus on digital content and gaming, which are less subject to supply chain issues. Revenue from the Wizards of the Coast franchise, for example, was up 32% in the third quarter. Management is guiding for a revenue increase in the fourth quarter and a double-digit percentage increase for the year.
Hasbro pays a plush dividend that yields 2.7% at its current share price. Its stock has underperformed the S&P 500 after slumping in 2020, but it's on track to post a solid holiday performance and reward investors.
An education technology company selling at a huge discount
Parkev Tatevosian (Chegg): Education technology company Chegg emphasizes services for the college curriculum, helping students get through their courses with less stress and a little more confidence. For a subscription fee of less than $20 per month, students get access to over 70 million pieces of content, as well as the ability to ask up to 20 questions a month and have them answered by subject-matter experts.
Those questions and step-by-step solutions then become part of Chegg's database, which can be viewed by all other subscribers, present and future. It's a clever method for creating precisely content your subscribers want -- by literally making the content those customers ask for.
It's proving to be a lucrative business model. Chegg will have grown adjusted earnings before interest taxes, depreciation, and amortization by 65% from 2015 to the end of its fiscal 2021. The company pays for each piece of content once, but it can remain in the database and useful for years, or potentially, decades.
What's more, the content library acts as a low-cost customer acquisition tool. Students looking for help on their coursework may query a search engine to find answers or guidance. If Chegg has the specific help they need, its website will pop up in the search results. A few clicks later, the student gets the help they require, and Chegg gets a new subscriber.
Chegg's stock price is down 68% in 2021. While most U.S. colleges have brought students back to campus for in-person learning, some students balked at the idea of returning to classrooms, dining halls, and dorms, and college enrollment fell. Still, fears of contracting COVID-19 while on campus are likely to prove a temporary headwind. Over the long run, we can expect young people will continue to pursue higher education in growing numbers, given the benefits it provides. Nevertheless, Chegg's recent share drop has created an opportunity for investors to pick up an excellent stock at a relative discount. That's why it's my top stock to buy in December.