The S&P 500 is back at record highs, confirming that the current bull market began in October 2022 and continues today. Reaching that milestone reinforces confidence in the market, motivating investors to search for the stocks that will lead its upward move.
None of us know the future, so the "leaders" might not be apparent until we can look at the bull market from a historical perspective. Nonetheless, many tech stocks are in a growth mode, and a few stocks are likely to stand out.
To that end, three Motley Fool contributors offer their takes on companies that could outperform the market as stocks trend higher.
Alphabet's fundamentals make it a force to be reckoned with
Jake Lerch (Alphabet): My pick is Alphabet (GOOGL 10.22%) (GOOG 9.96%), the parent company of Google and YouTube. What I really like about Alphabet are its solid fundamentals.
Let's start with the top line: revenue. In its most recent quarter (the three months ending on Dec. 31, 2023), Alphabet generated $86.3 billion in revenue. For context, that's about the same amount Walt Disney generates in a year.
Moreover, Alphabet is growing that revenue by 13% year over year, the quickest pace for the company dating back to early 2022.
Second, it's converting much of that revenue into profits. The company's operating margin -- the portion of revenue converted to operating profit -- stands at 27%. That's above the 10-year average of 25.6%.
Lastly, the company is built for the future as a major player in both cloud services and artificial intelligence (AI).
Its cloud services segment, Google Cloud, generated $9.2 billion in revenue in its most recent quarter, up 26% year over year. Better yet, the segment reported an operating profit of $864 million, for a 9% margin. That's important, as the unit hasn't always been profitable.
And the company's massive reserves (over $100 billion in cash) mean management can increase shareholder returns by introducing a dividend or by expanding its already enormous $70 billion share-repurchase plan.
Alphabet remains a company with giant revenue streams and solid profitability. It has cash to burn that could be used to increase shareholder returns. In short, it's a great stock to consider as the bull market rolls on.
Salesforce is on the verge of new all-time highs in this latest bull market
Justin Pope (Salesforce): Enterprise software provider Salesforce (CRM 0.42%) has successfully evolved from its customer relationship management roots to become a one-stop shop for almost everything a company could need.
Today, the business is doing nearly $34 billion in annual sales, and the stock carries a $275 billion market cap. Yet there is still a clear case for further investment upside.
Management has leaned into cutting costs to drive higher operating margins. The company posted 31.2% adjusted operating margins in the third quarter, an improvement of 850 basis points year over year. It's also repurchasing stock, reducing outstanding shares by 2% over the past four quarters, with another $10 billion in authorized repurchases remaining. That means fewer shares to spread profits over, so higher earnings per share and share prices.
Continued double-digit revenue growth and a leaner business should juice earnings growth. Analysts believe the company, which ended its fiscal year on Jan. 31, will end that period with $34.8 billion in sales and earn $8.20 per share.
Estimates average 11% revenue growth and 17% earnings growth over each of the next two years. The stock is arguably fully valued at a forward price-to-earnings (P/E) ratio of 34, but that's OK for long-term investors buying into a high-quality business like Salesforce. It can catch up to the stock's valuation if it hits analysts' estimates.
The recently confirmed bull market is now approximately 16 months old. Historically, bull markets last 42 months on average. Nobody knows how long this bull market will last, but the company's strong earnings growth could propel the stock to new heights if market sentiment remains positive for most of the next couple of years.
The short-term rental company poised for long-term gains
Will Healy (Airbnb): Airbnb (ABNB 0.75%) has driven opportunity and prosperity by linking real estate to technology. Its platform has helped spawn a vibrant short-term rental market, allowing landlords to lease a property to short-term tenants in a way that was almost impossible before its inception.
Technically, Expedia's Vrbo invented the concept. But Airbnb has leveraged technology to bring creative differentiation, such as renting spaces by the room and subletting unneeded apartments until a lease expires.
And investors might like the fact that AI is one of the technologies driving Airbnb. It has long used the technology to enhance its search tool, profile customers, and determine pricing in a local area.
More recently, it deepened its knowledge base in the field by acquiring GamePlanner.AI, allowing Airbnb to add a human touch to its AI tools and interfaces. Applying this technology could reinforce its competitive advantage.
Such technologies help Airbnb attract tenants and landlords. In the third quarter of 2023, active listings increased 19% over the previous year. Consequently, more than 113 million nights and experiences were booked during the quarter, a 14% yearly increase.
In the first three quarters of 2023, Airbnb earned $7.7 billion in revenue, a 19% increase from year-ago levels. That led to $3.8 billion in free cash flow over the same time frame, 29% more than the same period in 2022.
Such growth has attracted increased investor interest, and the stock has risen by nearly 35% over the last year. Despite the increase, the stock trades at 23 times its free cash flow, a reasonable valuation considering the growth Airbnb generates.
Ultimately, the marriage of short-term real estate leasing and technology has created a virtuous cycle attracting tenants and landlords, and the application of AI brings these parties together in unique ways, bringing new opportunities. Given the rise of revenue and free cash flow, that improvement should extend the returns of Airbnb's shareholders during the bull market.
