The last few years have been dynamic for growth stocks. A massive bubble and a rough return to Earth followed the March 2020 COVID-19 crash. Many investors lost faith. But growth stocks demand a prominent place in portfolios for a simple reason. They make shareholders lots of money over time, despite some ups and downs along the way. Want proof? Below is the total return of the growth and tech-heavy QQQ Trust (NASDAQ: QQQ) vs. the SPDR S&P 500 (NYSEMKT: SPY) for the last 10 years.
QQQ Total Return Level data by YCharts.
Go back 20 years, and the disparity is just as pronounced. Past performance is no guarantee of future results; however, with fantastic tech companies generating solid revenue and cash flow, it isn't likely to change soon.
Having cash on hand is always a great idea, but having too much uninvested cash isn't good practice; it doesn't make any returns. So, if you have $5,000 in an account, perhaps from selling a winning stock or cutting bait with a loser (it happens), or maybe an unexpected windfall, take a look at these two companies.
Airbnb: Where's the buzz?
If a company isn't hyping up its artificial intelligence (AI) prowess, it's not making headlines these days. This is perfect for long-term investors interested in Airbnb (ABNB -1.52%). The stock has made terrific gains this year (+67%), but that doesn't tell the whole story. Since going public in late 2020, the stock price is down 9%, while the price-to-sales ratio (P/S) fell over 50%. Compare this to a stock like Nvidia (NASDAQ: NVDA), which rose 242% and nearly doubled its P/S valuation over that time. This is depicted below.
Nvidia is undoubtedly a terrific company, but the AI spotlight makes it extremely expensive.
While Airbnb's price and valuation are down since its IPO, business and profits are on fire. Airbnb went lean during the pandemic, and this catapulted it into profitability. The company reported $1.9 billion in net income and $3.4 billion in free cash flow (FCF) in 2022 on $8.4 billion in revenue. This revenue is 75% higher than in 2019 (the last year before COVID-19), and the fiscal year's net income was the first in Airbnb's short history. The success continued this year with the first profitable Q1 on record.
Even better, Statista shows that the global travel & tourism market hasn't fully recovered yet, but it should this year and will continue to grow. Airbnb is a forgotten stock amid AI hype, which could make now an excellent time to buy.
Is Amazon stock a buy?
Amazon (AMZN 2.29%) stock has risen significantly off its recent lows but still trades at a depressed valuation. The company is an excellent mirror for what happened from the days of the pandemic through today. Immediately following the onset, stimulus checks and the push toward e-commerce boosted revenue and earnings, and the stock soared. Then the boomerang effects of inflation, heightened labor costs, logistical snarls, etc., pushed its North American and International segments into the red. Amazon Web Services (AWS) remains profitable (24% operating margin last quarter), but growth is slowing along with the economy. There is plenty of good news if we know where to look.
First, growth is still tremendously impressive. Sales grew 9% last quarter to $525 billion over the last 12 months. This means sales have grown 87% in a little over three years. Second, Amazon will see tremendous benefits from AI. The company already harnesses it to increase logistical efficiency, effectively place products for advertisers, and improve other areas. But the gigantic opportunity is for AWS. What does AI software require more than anything? Massive amounts of data and processing power. AWS offers the platform to build and deploy this technology. Finally, Amazon still has a massive share of the eCommerce market, over 200 million Prime subscribers, and an excellent advertising business ($38 billion in 2022 sales, 91% higher than in 2020).
Amazon stock can't accurately be valued with a price-to-earnings (P/E) ratio because profits are depressed right now. But, the P/S ratio needs to rise 30% to reach its average level since the beginning of 2018, as shown below.
AMZN PS Ratio data by YCharts.
Great companies like Amazon don't stay down for long (it's already making a comeback), making it a compelling option for growth investors.
Airbnb and Amazon are both terrific options for growth investors. For investors looking to allocate $5,000, Amazon is the safer play with its wide breadth of offerings, but Airbnb offers higher upside potential given its smaller size. Splitting the investment based on risk tolerance makes sense to get the best of both worlds.
