Adding $100 to the stock market each month can be one of the most straightforward paths for young investors to fund their retirement. While it may not sound like much, a 25-year-old adding $100 monthly at the S&P 500 index's average return of 10.2% (from 1957 to 2022) would wind up with $591,000 in 40 years.
Better yet, wise investment choices and a long-term buy-and-hold approach could help you outperform the broad market.
With this goal in mind, let's discuss why Zoom Video Communications (ZM 1.57%) and Nasdaq (NDAQ -0.28%) are two of the best stocks under $100 to start buying each month -- especially at today's discounted valuations.
1. Zoom Video Communications
After reaching dizzying heights during the pandemic, Zoom's share price has settled in around the $70 mark -- down nearly 90% from its all-time high.
Facing steadily declining sales growth that dropped to just 3% in its most recent quarter, investors may assume that one of the lockdown's most prominent stars has already seen its brightest days.
However, Zoom is rapidly developing into a broader platform beyond the Meetings video product it is most famous for.
First, the company's enterprise-grade Zoom Phone product has quickly grown to account for more than 10% of overall sales. Launched just four years ago, the product line now boasts over 5.5 million seats (users). Building on this success, Zoom's 215,000 enterprise customers now account for 57% of its revenue and have spearheaded the company's shift to a more comprehensive communications platform.
Furthermore, Zoom continues to build out its contact center capabilities following its $112 million acquisition of customer support automation specialist Solvvy. Using Solvvy's technology, Zoom developed a virtual agent that it uses internally with customers, and it has seen the solution successfully address over 90% of incoming inquiries.
These contact center capabilities, paired with Zoom's artificial intelligence ambitions, such as summarizing meetings or sales information, highlight the company's impressive growth potential. Best yet, the company is armed with $5.6 billion in cash -- giving it ample funding for future tuck-in acquisitions like Solvvy, or more recently, Workvivo.
However, Zoom's stock-based compensation (SBC) is one thing to watch going forward.
Data by YCharts.
Though the company's SBC returned to normal(ish) levels in the first quarter of 2023, it still equaled roughly 26% of sales. So while the $397 million in free cash flow (FCF) created during the quarter is very real, SBC remaining at these levels over the long term will dilute shareholders if it is not gradually reined in.
Ultimately, Zoom's steadily growing sales to enterprise customers should whittle away at its high SBC levels over time. With an enterprise-value-to-FCF ratio of just 14, Zoom's cheap valuation and nascent growth options look perfect for patient, buy-and-hold investors.
2. Nasdaq
Down over 10% since announcing that it would acquire risk management and regulatory software provider Adenza for $10.5 billion, Nasdaq is facing investor skepticism.
Perhaps the biggest point of contention in the deal is that Nasdaq will need to raise $6 billion in additional debt to fund the acquisition. While complementary to Nasdaq's existing anti-financial crime operations, the purchase would leave the company highly levered with over $11 billion in total long-term debt versus a market capitalization of $25 billion.
However, the company's strong FCF history demonstrates that this added debt is far from a make-or-break proposition.
Data by YCharts.
In addition to these historically positive and steadily growing FCF figures, Nasdaq expects Adenza to bring in around $300 million in pre-tax cash flow annually. Better yet, management projects over $80 million in annualized expense savings and $100 million in cross-selling synergies over the long term.
Generating over 80% of its revenue from annually recurring sources, the Adenza purchase would help propel Nasdaq's ambitions to become a software-as-a-service focused company. Despite its trading services, listings, and index segments all somewhat dependent on the whims of the market, the newly combined company would generate over 60% of sales from annually recurring revenue, providing valuable stability.
Trading at just 17 times FCF, Nasdaq is the cheapest it has been since the start of the pandemic. Similarly, its 1.7% dividend yield is the highest it has been since 2020.
Counting 10 consecutive years of dividend increases, management expects to continue raising its payout, even with the higher debt load. With a payout ratio of only 34% as of this writing, Nasdaq should have ample room for these higher dividend payments and is an excellent business for investors looking to build their passive income.
With Adenza growing sales organically by 15% last year and operating in an industry expected to grow 8% annually, look for Nasdaq to see decades of expansion amid ever-tightening regulation in the financial world.
