Robinhood Markets, the online broker that's grown in popularity thanks to its commission-free and easy-to-use stock trading platform, publishes the top 100 most-held stocks on its site through the Robinhood Investor index. While picking stocks based solely on their popularity is far from a perfect investing strategy, the list can serve as a good hunting ground for potential market-beating companies. And Amazon (AMZN 0.29%) and Alphabet (GOOGL -3.58%) (GOOG -3.44%) are two examples of just that.
Amazon
The world's largest e-commerce company has had a rough go of it over the last few years. After investing heavily in new staff and extra fulfillment infrastructure to match the pandemic-driven demand for online shopping, the company has struggled to generate consistent profits due to excess capacity. Management has attempted to address this problem through various cost-cutting initiatives including layoffs in certain divisions like Alexa and Luna, the company's cloud gaming platform.
But despite the bad news capturing most of the headlines and even leading to a 30% decline in the stock price from recent highs, the company has been quietly taking steps to grow its bottom line while also solidifying its already impressive moat. Throughout 2021 and 2022, Amazon invested roughly $125 billion in capital expenditures with much of those dollars going toward the continued buildout of its fulfillment network. While this left the company with too much space in the short term, it also helped advance Amazon's already unbeatable delivery times, making it pretty much impossible for other e-commerce sites to compete with.
This logistics lead helps drive not only retail sales, but also advertising revenue. As more and more shoppers continue to go through Amazon, third-party sellers will bid to promote their products. In fact, over the last 12 months, Amazon has generated just over $39 billion from this high-margin form of advertising revenue and is growing that figure by more than 20% a year. That makes Amazon the third-largest advertising business in the U.S. by revenue.
Separately, Amazon is also seeing continued success in its Amazon Web Services (AWS) division, which is the world's largest cloud infrastructure provider. AWS delivered $83 billion in revenue and $21 billion in operating income over the trailing 12 months, and now accounts for 17% of Amazon's total sales versus just 11% five years ago.
As these higher-profit-margin divisions continue to make up a larger percentage of Amazon's sales, the company could soon be generating 10% operating margins compared to its last five-year average of roughly 5%. Based on the company's current sales figure, that would mean that Amazon is valued at a ratio of market cap to potential operating income of 27 times. That strikes me as a fair price to pay for a competitively advantaged business that should continue growing its sales from here.
Alphabet
Alphabet is the parent company of the world's largest search business, Google. While the company has received plenty of heat over the last year due to concerns around competition from generative artificial intelligence (AI) products like ChatGPT and Microsoft's (MSFT -1.30%) search browser Bing, Alphabet continues to churn out stellar results.
Despite an overall slowdown in advertising spending broadly, Google just reported $43 billion in quarterly advertising revenue from its search business, which is up 5% from a year ago. But there are also lots of other businesses under Alphabet's umbrella that should have investors excited, in particular, the Google Cloud Platform (GCP).
GCP is the third-largest cloud infrastructure business behind Amazon's AWS and Microsoft's Azure, and it's growing rapidly. In its recent second-quarter report, the company said Google Cloud was on an annual revenue run rate of $32 billion, which was up 28% from the year prior. Additionally, Google Cloud's operating profit margin has gone from negative 62% at the start of 2020 to 5% in the most recent quarter. As this high-switching-cost business continues to scale, GCP should begin to really help bolster Alphabet's bottom line.
Beyond cloud and search, Alphabet is also home to the world's largest video-sharing platform, YouTube. Since 2018, YouTube has grown its advertising revenue from $11 billion to $29 billion, all while pushing 80 million users toward its ad-free subscription tier, YouTube Premium. As users continue to add new content to YouTube's already vast catalog, growth should come relatively easy for the video-sharing giant since it doesn't have to pay to generate any of the content itself.
At Alphabet's current enterprise value to free-cash-flow multiple of just 22x, I think investors today are getting one of the best digital businesses in the world at a bargain price.
