One school of thought says the S&P 500 recently entered correction territory, which is typically defined as a 10% drop from a bull market peak. The index arguably slipped below that threshold last week, but that viewpoint is predicated on the idea that a new bull market started in June.
Another school of thought says the S&P 500 never left bear market territory, which is usually defined as 20% decline from a bull market peak. The index last reached a record high on Jan. 3, 2022, and some investors believe it must reclaim that level before a new bull market begins.
Either way, history makes it clear that the S&P 500 will eventually rebound, so investors should treat the current situation as a buying opportunity. Here's why I'd buy shares of Cloudflare (NET 1.44%) and Amazon (AMZN 3.43%) in a heartbeat today.
1. Cloudflare
Cloudflare provides a range of cloud services that make corporate applications and infrastructure faster and more secure. Several qualities distinguish the company, but two of the most important are engineering prowess and scale. Cloudflare has assembled the fastest cloud network in the world, and its platform powers about 20% of the internet.
That scale provides deep insight into performance issues and cybersecurity threats across the web, and each data point improves its ability to route traffic and prevent attacks. The upshot of unparalleled speed and a profound data advantage is that Cloudflare has earned a leadership position in several cloud verticals, including content delivery network software, web application protection, zero-trust network access, and edge development platforms.
Though economic headwinds persist, Cloudflare still delivered a solid financial performance in the second quarter. Its customer count increased 15% to 174,129, and the average customer spent 15% more. In turn, revenue rose 32% to $308 million and the company reported non-GAAP net income of $34 million, up from breakeven in the prior year. Investors have good reason to believe that momentum will continue.
Cloudflare integrates with public clouds and private data centers to provide a unified view of corporate IT environments, but the same cannot be said of vendors like Amazon Web Services and Microsoft Azure. One consequence of its infrastructure-neutral positioning is that Cloudflare has become quite popular with artificial intelligence (AI) start-ups. Indeed, CEO Matthew Prince believes the company is "uniquely positioned to become a leader in AI inferencing."
On that note, Cloudflare sees its addressable market surpassing $200 billion by 2026, and Morningstar strategists expect the company to grow revenue by 34% annually over the next five years. That makes its current valuation of 16.6 times sales look reasonable, and that multiple is an absolute bargain compared to the three-year average of 40.3 time sales. That's why this growth stock is a screaming buy.
2. Amazon
Amazon is the e-commerce leader in North America and Western Europe, and its market share is still trending upward. Brand authority and an expansive logistics network are the forces behind those share gains. The Amazon brand is synonymous with digital retail, and its ability to support sellers with fulfillment services (and delight buyers with fast delivery) strengthens the network effect inherent to its marketplace.
As a retail juggernaut, Amazon has an unparalleled ability to engage consumers and source shopper data. That advantage has been an explosive growth driver for its advertising business. Amazon accounts for 75% of U.S. retail ad spend, 10 times its nearest competitor, and it recently became the third-largest adtech company in the world. According to eMarketer, Amazon will continue to take share in the coming years while market leaders Meta Platforms and Alphabet's Google tread water.
The third cornerstone of Amazon's business is cloud computing. Amazon Web Services (AWS) has long been the gold standard in cloud infrastructure and platform services, and it holds nearly as much market share as Microsoft Azure and Alphabet's Google Cloud Platform combined. IT consultancy Gartner attributes that success to AWS having the "greatest breadth and depth of capabilities of any provider."
Amazon delivered strong third-quarter results, beating estimates on the top and bottom lines. Revenue increased 13% to $143 billion on particularly strong growth in retail and advertising, and GAAP net income more than tripled to reach $9.9 billion. Investors can expect similar results for the foreseeable future.
Amazon has a strong presence in three growing markets. Straits Research says online retail sales will increase by 8% annually through 2030, and Grand View Research expects the cloud computing and adtech markets will expand by 14% annually during the same period. Those forecasts hint at low-double-digit revenue growth for Amazon through the end of the decade.
In that context, its current valuation of 2.5 times sales looks cheap, especially when its three-year average is 3.1 times sales. That's why I'd buy this growth stock in a heartbeat right now.
