What are some of the characteristics of a stock that could set you up for life? First, the company needs to operate in an industry that will command high levels of demand long into the future. Second, it needs to deliver strong financial growth to ensure its stock increases in value over time. Third, it should have a sturdy track record of prior success.
Given that so many stocks were heavily beaten down amid the broader bear market, the new year offers a great opportunity to invest for the ultra-long term. A panel of three Motley Fool contributors thinks Alphabet (GOOGL 0.55%) (GOOG 0.74%), Snowflake (SNOW 2.53%), and MercadoLibre (MELI -1.79%) are monster growth stocks that investors might want to consider buying now and holding forever.
A trillion-dollar giant with plenty of upside in the tank
Anthony Di Pizio (Alphabet): Until 2015, Alphabet was simply known as Google. It renamed itself to more accurately reflect the company's growing and increasingly diverse businesses -- even though the world's leading search engine still drives most of the tech giant's revenue. Its remarkable track record of success helped it reach a market valuation of over $1.2 trillion while maintaining its appetite for innovation, setting it up for an exciting future.
One of Alphabet's fastest-growing segments is Google Cloud. More businesses are shifting more of their operations online to streamline workflows, seamlessly connect their teams across the globe, and better serve their customers. This led to a surge in demand for cloud services. It's an industry that could exceed $1.5 trillion in value by 2030, according to Grand View Research, and given Google Cloud's revenue came in at just $6.8 billion in the third quarter, it has plenty of market share yet to capture.
The other Alphabet business investors should watch closely is YouTube. It's the world's leading video streaming platform, and it recently made the leap into the short-form format to compete with ByteDance's blockbuster mobile app, TikTok. In just two years since its launch, YouTube Shorts has already amassed 1.5 billion monthly active users and 30 billion daily video views.
While the advertising industry slowed because of a weakening economy, short-form video tends to attract a younger audience (more than 60% of TikTok's user base is under 29 years old). That younger generation demographic is still in high demand from remaining advertisers who are trying to place their ad spend for maximum effect during this market downturn and into what should be a better economic future, which could supercharge YouTube's financial growth.
Overall, Alphabet delivered $282 billion in revenue and $5.03 in earnings per share over the last four quarters. Its stock price is down 38% from its all-time high, and its price-to-earnings ratio of 18.6 falls well below its 10-year average P/E of 30.5. That spells opportunity for investors because this tech giant isn't simply part of the future -- it's set to shape it.
This Snowflake is special
Jamie Louko (Snowflake): As more businesses and entities gather way more data of all sorts, companies specializing in data storage and analysis have become one of the most exciting sectors to invest in for the long haul. Snowflake management estimates that, by 2026, the data warehouse and storage industry alone could be worth $173 billion. Snowflake is operating in this industry, helping businesses store and analyze data across multiple different systems and cloud platforms.
Company data stored in cloud systems tend to be fragmented across multiple platforms, making it hard for businesses to analyze all that data together and derive actionable insights from it. Snowflake enables customers to bring that dispersed data together and analyze it jointly. This unique aspect of Snowflake's business is one of the main reasons for its stellar success: Revenue for the company soared 67% year over year in its fiscal 2023 third quarter (which ended Oct. 31) to $557 million.
Customers are also rapidly expanding their relationships with Snowflake. The company's remaining performance obligations -- essentially, agreements from customers to spend money on its services in the future -- shot 66% higher to $3 billion in fiscal Q3. Additionally, the company's net retention rate was 165% during the period. That's an incredibly high net retention rate (although it fell a bit as the year progressed and the economy worsened).
Over the past year, the company's free cash flow rose by a staggering 622% to $65 million, giving it a margin of 12% in fiscal Q3. And Snowflake isn't done yet: Management has set a goal for it to reach an adjusted free cash flow margin of 21% this fiscal year. With this much cash coming in, the company has plenty of flexibility to invest in product development to increase the stickiness of its tools.
The biggest concern about Snowflake has been its valuation. The stock has always traded at high multiples, but they have come down substantially. Now, Snowflake trades at 23 times sales. This is still a high multiple, but it's the company's lowest valuation ever as a public company. Therefore, now could be the right time to add Snowflake to a diversified portfolio and hold it for the long haul.
The largest online commerce and payments ecosystem in Latin America
Trevor Jennewine (MercadoLibre): MercadoLibre is often called the Amazon of Latin America. There are differences between the two businesses -- Amazon provides cloud computing services, and MercadoLibre provides digital wallet services -- but the similarities are too great to ignore.
Specifically, MercadoLibre helped popularize online shopping in Latin America, it operates the most-visited online marketplace in the region, and it reinforced its leadership with a massive logistics network that simplifies fulfillment for sellers and provides reliable delivery for buyers. The company further enhanced the network effects that power its business by offering solutions for digital advertising, payment processing, and financing.
Those products draw more merchants to its ecosystem, increasing the array of inventory available on the MercadoLibre marketplace and broadening the acceptance of the Mercado Pago digital wallet. That gives consumers a more compelling reason to use both products, driving further adoption of the marketplace and usage of the digital wallet.
Thanks to that virtuous cycle, MercadoLibre reported strong financial results on a consistent basis in recent years. Revenue grew at an annualized rate of 68% since the third quarter of 2019, while free cash flow per share increased at an annualized rate of 76%.
Investors have good reason to expect that momentum will continue. Bank account and debit card penetration remain relatively low in Latin America when compared to North America and Europe. That should be a tailwind for MercadoLibre's fintech business. Meanwhile, its three largest markets -- Argentina, Brazil, and Mexico -- rank among the 10 fastest-growing countries in the world in terms of e-commerce sales, creating a tailwind for its commerce business
More broadly, Latin America is one of the fastest-growing regions of the world in terms of internet penetration. That should lead to greater adoption of online shopping and digital payments in the coming years, which leaves MercadoLibre well-positioned to create value for shareholders.
With that in mind, shares currently trade at 4.7 times sales, a fantastic bargain compared to their 3-year average of 13 times sales.
