Some investors define the beginning of a bull market as the point when the S&P 500 rebounds 20% from a bear market low. But other investors reserve the term for when the index reaches a new record high. The S&P 500 has already entered a bull market based on the former definition, and it sits just 6% from bull market territory based on the latter.
Regardless of whether a bull market is underway or still to come, the S&P 500 returned an average of 285% during the last five bull markets, according to data from Yardeni Research, and the next one will undoubtedly send many stocks higher. Several Wall Street billionaires with enviable track records are betting big on certain FAANG stocks ahead of the rally.
Here are the details.
What makes a hedge fund manager brilliant (besides being a billionaire)?
Not many hedge fund managers consistently beat the S&P 500. In fact, three-quarters of large-cap funds underperformed the benchmark index over the last three years, according to data from S&P Global, and the statistics get progressively worse from there. So hedge fund managers who overcome the odds are worth watching and potentially worth mimicking.
David Tepper's hedge fund Appaloosa Management returned 60% during the three-year period that ended in June, outpacing the 44% return from the S&P 500. Tepper had more than 7% of his portfolio in Amazon (AMZN 3.43%) at the time, making it his fourth-largest holding. Fellow market-beating billionaires Israel Englander and Steven Cohen also had more than 1% of their portfolios invested in Amazon when the June quarter ended.
Meanwhile, Karthik Sarma's hedge fund SRS Investment Management soared 112% during the three-year period that ended in June, crushing the benchmark S&P 500. Sarma had nearly 12% of his portfolio invested in Netflix (NFLX -0.63%) at the time, making it his second-largest position.
Is Amazon stock a buy?
Amazon impressed Wall Street with a solid second-quarter report. Revenue increased 11% to $134 billion on strong growth across virtually every business segment, and the company reported a generally accepted accounting principles (GAAP) profit of $6.7 billion, up from a loss of $2 billion in the prior year.
The bull case here is simple: Amazon is the e-commerce market leader in North America and Western Europe, and global retail e-commerce sales are expected to increase by 8% annually through 2030. But Amazon is also the third-largest adtech company, and Amazon Web Services (AWS) is the largest cloud infrastructure and platform services provider. Both markets are forecast to grow at 14% annually through 2030.
Taken together, those forecasts hint at annual revenue growth in the low-double digits through the end of the decade. That makes its current valuation of 2.6 times sales look downright cheap, especially when the three-year average is 3.2 times sales.
Better yet, that estimate leaves room for surprise to the upside if Amazon can capitalize on surging interest in artificial intelligence (AI). AWS already has the broadest and deepest suite of AI services in the cloud, but the company is leaning into the growing demand for generative AI with two new products: Amazon Bedrock and Amazon CodeWhisperer.
Bedrock is a cloud service that provides access to pretrained large language models that help businesses build custom generative AI applications. Similarly, CodeWhisperer is a generative AI application that automates portions of the coding process to simplify software development. Bedrock and CodeWhisperer could be explosive growth drivers because the generative AI market is projected to expand at 36% annually through 2030.
Here's the bottom line: Amazon is a multifaceted business with clout in several growing markets, and its current valuation leaves room for market-beating returns in the next three to five years. Investors should consider buying a small position in this FAANG stock today.
Is Netflix stock a buy?
Streaming pioneer Netflix missed top-line estimates in its second-quarter report. Revenue rose just 3% to $8.1 billion, a deceleration from 9% growth one year earlier, and earnings climbed 3% to $3.29 per diluted share. Those lackluster results, coupled with potential fallout from the ongoing Hollywood writers' strike, caused shares to slip as much as 8% after hours.
However, there were two bright spots for investors. First, paid membership growth accelerated to 8% in the quarter, signaling that its cheaper, ad-supported service is attracting more subscribers. Second, Netflix launched paid sharing to monetize some of the 100 million households that currently access content via password sharing.
Turning to the future, the secular shift toward streaming media puts Netflix in front of two large opportunities: The subscription video market is forecast to climb at 7% annually to reach $118 billion by 2027, while the online video advertising market is expected to increase at 14% annually to reach $362 billion, according to Omdia. Netflix is working from a position of strength in both spaces, as it leads the streaming industry in engagement, revenue, and profits.
More importantly, much of its success can be attributed to proprietary media assets. Netflix captured 35% demand share for original streaming content in the second quarter, more than Amazon's Prime Video, Walt Disney's Disney+, Apple's Apple TV+, and Paramount Global's Paramount+ combined, according to Parrot Analytics. That objectively hints at more compelling shows and movies, which affords the company a powerful competitive advantage.
Here's the bottom line: Netflix has a good shot at annual revenue growth in the high single digits for the foreseeable future. The problem is valuation. The stock has doubled over the past year, and shares currently trade at 6.3 times sales. I am not convinced Netflix shareholders will see market-beating returns over the next three to five years from that valuation. Netflix is a wonderful business, but I think investors should keep this FAANG stock on their watch list for now.
