Meme stocks GameStop and AMC Entertainment are flying high again with their shares up over 30% in the past month while the S&P 500 has risen by a more modest 6%. But rather than getting caught up in what has been a volatile cycle involving these two stocks over the past year, there are better, more sound growth investments that you should consider for your portfolio.
Jazz Pharmaceuticals (JAZZ -1.65%) and Alibaba (BABA -1.14%) are two stocks that I would buy before even considering taking a chance on GameStop or AMC. Their businesses look promising over the long run and the stocks trade at modest earnings multiples.
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1. Jazz Pharmaceuticals
Jazz Pharmaceuticals is experiencing strong growth and generating some impressive margins along the way. In 2021, its revenue rose by 31% to $3.1 billion. Its top line received a boost from Epidiolex, which is a cannabis-based drug that is part of G.W. Pharmaceuticals, which Jazz acquired in the middle of last year. The drug treats seizures, and Jazz is launching it in more markets and attempting to get it approved for more indications. It's a potential blockbuster for the healthcare company that last year, on a pro forma basis, would have generated $658.3 million in revenue for Jazz (if it was part of the company for the entire year).
This year, Jazz projects that its sales will total between $3.46 billion and $3.66 billion, implying a growth rate of approximately 15% at the midpoint. And its gross margin on that will be an impressive 83%. Although Jazz didn't post a profit in 2021, it also incurred expenses due to its acquisition of G.W. Pharmaceuticals that weighed down its bottom line. This year, it expects its bottom line to be back in the black with a net income potentially as high as $185 million.
Jazz's stock has been flat in the past year (while the S&P 500 soared 14%) but it has the potential to be a promising investment. Multiple analysts see the stock rising to more than $200 per share within the next couple of years. And with the stock trading at a forward price-to-earnings (P/E) multiple of less than 10, it could be a steal of a deal; the average stock in the Health Care Select Sector SPDR Fund trades at more than 16 times its future profits. Jazz isn't an ultra-high-growth stock but it can make for a solid buy given its strong fundamentals.
2. Alibaba
Alibaba is a bit of a riskier buy than Jazz only because it's based out of China where there is plenty of uncertainty. One concern that has made investors wary of Chinese stocks is the threat that the U.S. markets could de-list their shares if they don't become more transparent and give U.S. authorities greater access to company audits. That could be years away from happening, if at all. And I'm also optimistic that it won't come to that, as it would likely only further harm China-U.S. relations.
That fear, however, has helped crush Alibaba's stock, which is down around 50% in just one year. And the company does have other challenges, such as its slowing growth rate. In its most recent period, for the quarter ending Dec. 31, revenue of $38.1 billion was up just 10% year over year. It was the slowest rate of growth since the company went public on the U.S. markets in 2014. In the near term, things may not get a whole lot better as lockdowns have taken place in Shanghai due to rising COVID-19 case numbers.
Although there's some risk, Alibaba is still a much better option than GameStop or AMC. It offers its consumers a wide array of products and services, including cloud computing, top e-commerce sites (alibaba.com, aliexpress.com), and entertainment and media. Last year, the company also invested in an autonomous driving start-up, DeepRoute.ai. And this year, it invested in another start-up, Nreal, which focuses on augmented reality and is seen as a metaverse play. Alibaba led a funding round in the business that involved other investors, which was worth $60 million.
Alibaba's business is getting broader and although its growth has slowed of late, there's reason for optimism that as the Chinese economy recovers from COVID-19, the company could be in great shape to benefit. At a forward P/E of 12, it's trading at less than half the premium tech stocks in the Technology Select Sector SPDR Fund trade at, where the average multiple is more than 25.
Buying the stock may be a bit of a contrarian move today, but Alibaba's robust and diverse business could set up investors for long-term profits.
