Tesla (TSLA +0.57%) and Amazon (AMZN 1.38%) were two S&P 500 components that saw their stock prices collapse by at least 50% in 2022. Combined, over $1.5 trillion in value evaporated in just 12 months from these two stocks alone.
Even now, it's hard to know whether the dust is finally starting to settle or more pain lurks ahead. But long-term investors know that powering through bear markets can be one of the most effective ways to compound wealth over time.
Tesla and Amazon are high-profile growth stocks that stand out as compelling buys. Here's why.
Image source: Getty Images.
Look at cash flow
Howard Smith (Tesla): There's no doubt Amazon and Tesla have both been amazingly successful. They are similar in other ways, too. Both generate large amounts of cash that continue to be reinvested in the business. But they are at different stages of business operations, giving investors more of a choice when deciding which may be the better buy now.
Being a less mature company, one would think Tesla would be pouring more of its cash generation into investments to continue to grow its business. But Tesla has actually been generating cash faster than it needs to spend it. The electric vehicle (EV) leader reported more than $6 billion in free cash flow (FCF) -- that is, after capital expenditures -- in the first nine months of 2022. Conversely, Amazon has had nearly $20 billion of negative FCF for the trailing-12-month period ended Sept. 30, 2022.
TSLA Free Cash Flow data by YCharts.
One of the biggest risks of investing in Tesla is that its growth rate doesn't hold up. Increasing competition and slowing global economies could hit demand for Tesla's vehicles. It's clear that Tesla's market share will decrease. The question is how fast the overall EV market itself grows.
Both Amazon and Tesla could have a place in a portfolio right now. Amazon seems to have over-expanded as it added fulfillment centers and employees in recent years. It has recently announced layoffs and looks to be in a contracting part of its business cycle. Much depends on the investor's personal approach. But for new money, it looks like a good time to buy Tesla.
Amazon's business model is unpopular right now
Daniel Foelber (Amazon): One of the reasons Amazon stands out as a particularly compelling buy is that its business model is not doing well in the short term and is out of favor on Wall Street. And when something is out of favor in the short term but works over the long term, it's typically a good buying opportunity.
Amazon's approach is to take any excess cash it generates from its operations and reinvest it to drive growth. It's basically the exact opposite strategy of a company like Apple (AAPL +0.06%), which historically uses its FCF to buy back its own stock and pay dividends while maintaining consistent, growing profits. Over the past 10 years, Apple has reduced its share count by a staggering 39.5%, while Amazon has diluted its stock through stock-based compensation and grown its share count by 12.2%. Apple's FCF is also consistently positive and up 150% in the last 10 years, while Amazon's is FCF negative.
AMZN Shares Outstanding data by YCharts.
During times of economic uncertainty, investors gravitate toward stability and value. The capital-intensive nature and risk of Amazon's business model make it a riskier bet than a stock like Apple. And for that reason, it's unsurprising that Amazon is down so much further than Apple from its all-time high over the last few years.
But overall, I think Amazon offers the single most attractive risk/reward on the market right now -- unlike Apple, which I would classify as low risk and moderate reward, or Tesla, which I would label a high risk and high potential reward. I would argue that Amazon is among the few stocks with a low risk and high potential reward.
Amazon has grown to become one of the most powerful brands in the world in multiple business-to-business and business-to-consumer categories. Its e-commerce and logistics are truly unrivaled, and its advertising business is incredibly powerful. Currently, it's the industry leader in cloud IT infrastructure, even with Microsoft and Alphabet aggressively investing to take market share. Throw in Amazon Video, Audible, Twitch, Whole Foods, and a slew of other Amazon subsidiaries, and you have a company that offers investors exposure to a wide swath of industries.
Given everything Amazon offers, I could see it easily becoming and staying the most valuable company in the world over the coming decades, outlasting any recession or economic downturn. That combination of stability and opportunity is simply too good to pass up -- especially with the stock down 54% from its all-time high.
The worst could be yet to come, but both stocks are still buys
Growth stocks like Tesla and Amazon could very well be in for more pain in 2023, even though both are already down big off their highs. Despite this risk, investors are getting good entry points into both stocks. Trying to time the market perfectly by buying a stock on the cheap is a fool's errand. Rather, increasing your savings rate during bear markets and investing in quality companies that you believe can compound over time are habits that can help lead you to lasting wealth.
Tesla and Amazon are facing slowing growth, which could make their performances look poor in the short term. The good news is that both companies' long-term investment theses have arguably gotten much better over the last two years, despite both stock prices being lower.
