The Reddit meme stock craze will long remembered by many members of the financial community. In early 2021, individual traders banded together and temporarily pumped up stocks that were on a path to bankruptcy.
If you want to build sustainable wealth over the long term, however, you should target businesses that are not in secular decline. Here are two popular Reddit stocks that belong in your portfolio.
1. Amazon: E-commerce and cloud computing
My first pick is one of the technology giants, Amazon (AMZN -0.15%). Amazon is one of the leading e-commerce marketplaces worldwide, with a dominant market share in the United States of just under 40%. If you add up Amazon's retail sales -- which include physical locations like Whole Foods -- the segment did $86.8 billion in revenue just last quarter. This is low-margin revenue, but Amazon is adding on a bunch of high-margin segments on top of its core e-commerce and retail offerings.
First, it has a robust subscription business with Amazon Prime and its other associated media offerings like Prime Video and Amazon Music. Subscription revenue hit $8.9 billion last quarter and should be a high-margin revenue driver for Amazon in the future.
Second, Amazon now has a robust advertising business that did $9.5 billion in revenue last quarter, growing 30% year over year in constant currency. Add both of these segments on top of e-commerce and there's an easy path for Amazon's retail/subscription/advertising business to generate tens of billions in profits sometime in the near future.
Amazon's e-commerce business is large and has tons of optionality, but the highlight of this company is Amazon Web Services (AWS). AWS is the leading cloud computing company worldwide, generating $76.5 billion in revenue and $22.9 billion in operating income over the last 12 months. With the explosive growth of the cloud market over the past decade, AWS has grown like a weed.
For example, in the third quarter of 2022, AWS generated $20.5 billion in revenue, up 28% year over year in constant currency. This is more than the segment generated in revenue for the entirety of 2017 ($17.5 billion).
With industry spending expected to grow by 15% a year this decade, AWS still has a long runway to grow over the next five to seven years and should eclipse $100 billion in annual revenue shortly. At about a 30% operating margin, this is a business that can do $30 billion in operating income on its own sometime in the near future.
Right now, Amazon's stock is down 47% this year and has a market cap of "just" $900 billion. With all the investments the company is making in infrastructure and new projects, its consolidated operating income is only $13 billion. But over the next five years, there's an easy path for Amazon to generate north of $50 billion in profits a year from AWS and e-commerce/advertising. If you agree with this, the stock is an easy buy at today's prices.
2. Mastercard: A duopoly in credit cards
Smaller than Amazon but still one of the largest companies in the world, Mastercard (MA 0.23%) is one of the two leading digital payments networks around the world along with Visa.
With the world slowly moving from physical cash payments to digital wallets, credit cards, and online purchases, Mastercard has been able to ride a steady industry tailwind to new heights over the last decade. In the last 10 years, Mastercard's annual revenue is up 192% with operating income up 211% due to steady margin expansion over its small fixed-cost base.
The thesis on Mastercard stock is simple: More people will spend money using digital methods over the next decade and the company will be able to retain its market share due to how entrenched it is with merchants, banks, and individuals.
Plus, the stock is not that expensive. At a market cap of $334 billion and with approximately $10 billion in trailing net income, the stock has a price-to-earnings ratio (P/E) of 33.4. This is above the market average, but for a business with such a clear path to growing its revenue and an entrenched position as one of the two major payment networks, Mastercard stock will likely do well for shareholders who buy and hold for at least five years.