Not many professional investors manage to beat the market on a regular basis. In fact, more than half of large-cap equity funds underperformed the S&P 500 through the first half of 2022, and a whopping 85% underperformed in 2021. But hedge fund managers Jim Simons and Karthik Sarma bucked the trend. Both investors beat the S&P 500 over the last three years, and that makes them a good source of inspiration.
The most important thing investors should know is that both fund managers bought stocks throughout the bear market. Last year, Simons increased his stake in Amazon (AMZN 1.49%) more than 76-fold, making the e-commerce company his second-largest holding. Meanwhile, Sarma added more modestly to his position in Netflix (NFLX -0.08%), though the streaming giant still ranks as his fourth-largest holding.
Is it time to open positions in these two growth stocks smart investors are buying?
1. Amazon
Amazon undoubtedly struggled as the economic environment deteriorated last year. High inflation simultaneously slowed revenue growth and accelerated operating expenses, and that combination produced disappointing financial results. Revenue increased just 9% to $514 billion in 2022, and the company reported a net loss of $2.7 billion, down from a profit of $33 billion in the prior year.
As a caveat, Amazon may continue to struggle in the near term, but temporary economic headwinds do not change the long-term investment thesis: Amazon is a major player in e-commerce, digital advertising, and cloud computing, three markets expected to grow quickly in the coming years. Yet, the stock currently trades at 1.9 times sales, near its cheapest valuation in the last eight years.
Amazon operates the largest online marketplace in the world, and it accounted for 38% of online retail sales in North America and Western Europe last year. Global e-commerce sales are expected to grow at 9% annually through 2026, according to eMarketer.
In digital advertising, Amazon is the fourth-largest adtech company in the world, and it is gaining ground on the market leaders, Alphabet's Google and Meta Platforms. In fact, Amazon increased its advertising revenue by 19% year over year in the fourth quarter, while Google and Meta Platforms both saw ad revenue drop by 4%. Global digital ad spend is expected to grow at 9% annually through 2030, according to Precedence Research.
In cloud computing, consultancy Gartner recently recognized Amazon Web Services (AWS) as the leader in cloud infrastructure and platform services for the 12th consecutive year, noting that AWS offers a broader and deeper set of capabilities than any other vendor. Cloud computing spend is expected to grow at 14% annually through 2030, according to Grand View Research.
In short, Amazon is well positioned to deliver strong revenue growth for many years to come, which makes its current price-to-sales ratio look relatively cheap. That creates a buying opportunity for patient investors, and Wall Street agrees with that assessment. Currently, 49 out of the 54 analysts who cover Amazon rate the stock as buy or outperform.
2. Netflix
Netflix encountered a number of headwinds last year. High inflation and password sharing suppressed subscriber growth. In fact, the company actually reported a sequential decline in paying members in the first and second quarters, marking its first subscriber loss in more than a decade. Meanwhile, unfavorable foreign exchange rates reduced sales growth by 6 percentage points. To that end, revenue rose just 6% to $31.6 billion in 2022.
However, Netflix gave investors three reasons to be optimistic in its fourth-quarter report. First, the company reported positive free cash flow (FCF) of $1.6 billion in 2022, up from a loss of $159 million in 2021, and management expects to stay FCF-positive going forward. Second, the company recently started its paid sharing program to help monetize the more than 100 million households that currently access content without paying. Third, Netflix launched its ad-supported streaming plan in November, and it has already reenergized subscriber growth to some degree. Better yet, ad-supported content represents a large and previously untapped market opportunity for the company.
Consumer spend on subscription video plans will grow at 7% annually to reach $118 billion by 2027, but brand spend on online video ads will grow at 14% annually to reach $362 billion during the same period, according to Omdia. Netflix is perfectly positioned to capitalize on both opportunities. It leads the streaming industry in engagement, revenue, and profits, and its ability to create compelling original content is second to none. According to Parrot Analytics, Netflix accounted for 41.5% of demand for original content last year, more than the next five streaming services combined.
Shares currently trade at 4.6 times sales, well below the five-year average of 8.3 times sales. At that price, investors should consider buying a few shares of this growth stock.
