There are times when the market hates growth stocks. Throughout 2021, many top winners from 2020 have been hammered, but time has shown that persistently adding shares of growing companies to your portfolio is a great way to multiply your savings over time.
Three Motley Fool contributors recently picked stocks they believe will deliver big gains over the long term. Here's why they chose Costco Wholesale (COST 1.01%), Airbnb (ABNB 2.77%), and Netflix (NFLX 4.17%).
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This wide-moat retailer is stronger than ever
John Ballard (Costco Wholesale): Costco has delivered market-beating returns to investors for many years. It's got an impenetrable competitive moat built on keeping costs as low as possible to deliver unbeatable value to customers. The key to accomplishing this is the annual membership fee, which generates most of Costco's operating profit and subsidizes the savings that customers receive in return.
It's a terrific business model that produces consistent operating performance. Costco ended fiscal 2021 with a total of 61.7 million paid members, up from 58.1 million in fiscal 2020 and 53.9 million in fiscal 2019.
Despite the industrywide supply problems, Costco continues to report growth well above its pre-pandemic trend. In the fiscal first quarter of 2022, net sales grew 16.7% over the year-ago quarter, compared to 5.6% in the same quarter in 2019.
The only problem is that the stock has gotten very expensive. The forward price-to-earnings ratio currently sits at 44 times the consensus analyst estimates for fiscal 2022 earnings per share (EPS). It looks overpriced, but that's why I would consider gifting shares to someone who is just getting started with investing. A good buying strategy to consider with Costco is to dollar-cost average over regular intervals.
Either way, Costco is a great stock to anchor anyone's portfolio.
All wrapped up and ready to go
Jennifer Saibil (Airbnb): It's been quite a year for Airbnb, which went public exactly a year ago at a curious time. Sales were drastically down due to the coronavirus, but it ended being the biggest initial public offering of 2020 by market cap. Despite that, it's been a rough debut, and Airbnb's share price has fluctuated wildly, now up 23% for the year.
But it's not about the past, it's about the future. And the future looks good for Airbnb. The travel company has a unique niche with unmatched advantages in its industry, and its powerful potential is demonstrated each time a traveler chooses one of its vacation rentals instead of a hotel room. It can grow as fast as it can add rentals to its platform. It works with hosts who offer many residences and have created their own businesses on the platform as well as people who offer a room in their own residence. So while it's focused on recruiting more hosts, many hosts do the expansion work themselves as they benefit from the opportunity and add more rentals to the site. COVID-19 has accelerated its adoption by increasing work-from-home opportunities, and longer stays have become an increasingly large part of total rentals, accounting for 20% in the 2021 third quarter.
Airbnb has been doing brisk business, with figures that are toppling pre-pandemic performance. Revenue increased 67% year over year in the third quarter, or 36% over two years, for a total of $2.2 billion. It also posted a nice profit of $834 million.
The company is shortly rolling out a handbook upgrade, and is otherwise working on maintaining its excellent prospects for further growth. As we look into the post-pandemic future, trends are working in its favor from many directions, and now's a great time to buy shares of this travel company.
Netflix could be a gift that keeps on giving this holiday season
Parkev Tatevosian (Netflix): One stock to put under the Christmas tree this year is Netflix. The well-known streaming pioneer is likely to put a smile on the recipient's face. Indeed, Netflix stock has put a smile on the faces of existing shareholders -- over the previous five years, its shares are up 391%. The company has reached a massive scale and is reaping the benefits.
As of Sept. 30, Netflix boasted 214 million subscribers. That's up from 195 million in the same quarter last year. The pandemic onset sent hundreds of millions of people home from work, school, and anything else they were doing elsewhere. Unsurprisingly, it created a surge in demand for in-home entertainment, and Netflix was a prime beneficiary.
Fortunately for investors, Netflix's business was built with a foundation that can absorb millions of new customers at little cost. After all, it doesn't take much work for Netflix to show its content to an extra 25 million or 50 million people. That low variable-cost foundation has allowed Netflix to expand its operating profit margin from 7.2% in 2017 to 18.3% in 2020.
In its most recent quarter, Netflix reported revenue of $7.5 billion; annualized, that would be $30 billion. With that massive sum of cash coming to Netflix, it can spend aggressively on creating and purchasing content. The new programming will entice more members to join Netflix and existing customers to stick around longer. That virtuous cycle could make Netflix stock the gift that keeps on giving this holiday season.
