So, you have $5,000 in your investment account. Maybe you made a deposit, got some dividends, or perhaps you sold a winning or losing (that's OK, it happens!) stock. Santa might drop some money in your stocking this year.
Whatever the case, what you do with it depends on many factors, like your age, investment strategy, and risk tolerance. You might not be looking for growth stocks at all. After all, a certificate of deposit (CD) pays over 5% interest now. But if you want to be more aggressive, these growth companies are terrific options.
Is Amazon stock a buy after earnings?
A lot of investors were nervous going into Amazon's (AMZN 3.43%) third-quarter earnings last Thursday, especially after Alphabet disappointed Wall Street and dropped nearly 10% in the days following its earnings release. But Amazon silenced a lot of doubts. Two things stuck out to me as huge positives.
1. Top-line growth
Amazon's total revenue growth accelerated to 13% year over year (YOY) after growing 11% YOY in the second quarter. The growth was led by a 25% gain in digital advertising sales, which reached $12 billion in the quarter. This comes despite an overall slowdown in the ad market this year. Amazon's ads, like product placement and display, are highly targeted at consumers actively shopping. This makes them extremely efficient and popular with advertisers.
Amazon Web Services grew 12% YOY (more on AWS below), and third-party seller and subscription services 18% and 13%, respectively. Amazon stock tends to trade on sales growth more than anything, which explains why the stock popped 8% after earnings.
2. Cash flow is back
Free cash flow (FCF) is a leading indicator; it often precedes big profits. FCF is the money left after a company funds its operations and buys property and equipment, known as capital expenditures or capex. Amazon's FCF soared when COVID-19 stimulus and increased online shopping were thriving, and so did its profits. Then, the economy turned, and Amazon's FCF and profits fell.
As shown below, Amazon is back in the money:
Data source: Amazon.
The trailing-12-month (TTM) free cash flow reached $21 billion in Q3, the highest point since back in the first quarter of 2021. I have been presenting versions of this chart for more than a year and noting the increases even when FCF was still negative. It's no coincidence that net income rose 244% this quarter from $2.9 billion to $9.9 billion. Now Amazon gets to build on this momentum just in time for the holiday shopping season. It's a great setup.
Amazon stock popped after earnings but still trades 12% off its 2023 high and 32% off its all-time high. With robust cash flow, profits, and momentum, the stock looks like a terrific long-term investment.
Intuitive Surgical is now undervalued
Robotic-assisted surgery is used at the Mayo Clinic, and by thousands of surgeons in the U.S. and around the world. You may have even noticed Intuitive Surgical's (ISRG 0.59%) da Vinci surgical system being used by "Dr. Now" to perform weight-loss surgery on recent seasons of My 600-lb Life. The bottom line is that robotic-assisted surgery is fairly mainstream now and should soon be the standard option for many surgeries.
The machines allow surgeons to do procedures less invasively than was previously possible. Advantages include fewer complications, quicker recovery with less pain, minimal scarring, and shorter hospital stays (your insurance company will love this!). Intuitive's system is far and away the market leader in the space, with 8,285 installed systems as of Q3 -- a 13% increase in the last year.
The obvious question that investors would ask is, "How will the company keep making money once the market is saturated with systems?" This is the brilliance of Intuitive's business model. It makes more than 75% of its revenue from recurring sources like instruments, accessories, and services. These items have a limited useful life; some are designed for a single use only. This means that:
- Systems placed continue to provide sales over time.
- Intuitive makes more money when more procedures are performed.
- Sales will stay high when system sales slow down.
Intuitive is very profitable, with a 25% operating margin this year, and it's swimming in cash. The company finished Q3 with 7.5 billion in cash and investments, which is more than 8% of the total market cap. The balance sheet holds zero long-term debt.
Because of its stellar growth, profitability, and financial health, Intuitive trades at a premium valuation. However, the stock has swooned 27% from its July 2023 high. This makes it attractively valued again based on its recent history, as shown below.
ISRG P/E Ratio data by YCharts.
The stock is 10% below its three-year average price-to-earnings (P/E) ratio, but the kicker is its forward P/E ratio. This ratio is based on Wall Street's estimates for next year's earnings. Depicted by the orange line, the forward P/E is 55% off the company's three-year average P/E. If Wall Street is correct, the stock has a lot of room to appreciate over the next year and beyond.
Growth stocks are retreating again, which long-term investors should see as an opportunity to buy great companies while others are running away. Amazon and Intuitive are terrific stocks to consider.
