Growth stocks are back in fashion. The current bull market has been going on for more than a year, and was preceded by a period of difficult conditions that particularly affected growth-oriented companies. Investors may be tempted to profit from the ongoing bull market by buying stocks that are likely to outperform during this period.
However, it is even more important to choose stocks that can deliver significant profits beyond the current operating period. Two great examples are: Amazon (AMZN 0.23%) and airbnb (ABNB -1.68%).
1. Amazon
Many people doubted Amazon in 2022. The company's revenue growth has been lackluster, advertising sales have been sluggish, expenses have increased, and it posted a rare net loss. The tech giant has since made a remarkable comeback, thanks in part to improving economic conditions. Amazon also initiated cost-cutting measures that helped bring the bottom line back into the black.
Amazon stock has delivered impressive returns over the past year, but there's a more important lesson here. Amazon's business is strong enough to withstand difficult market and economic conditions and emerge even stronger.
Even with a market capitalization of $1.76 trillion, the company's long-term prospects remain intact. Amazon is a leader in nearly every industry it operates in, and many have miles of growth left in them. No competitor has more market share in U.S. e-commerce and especially in the promising world of cloud computing.
Amazon's cloud computing division is the most profitable of them all. Amazon Web Services (AWS)'s revenue in 2023 was $90.8 billion, accounting for nearly 16% of the company's total revenue of $574.8 billion. However, AWS' operating profit was $24.6 billion, nearly 67% of Amazon's $36.9 billion operating profit. And last year was a down year for the cloud market. AWS revenue increased only 13.3% year over year.
Amazon's AWS growth has a long way to go and is probably benefiting from switching costs. Amazon's revenue and profits will only improve as the adoption of cloud services increases. The company is also entering the artificial intelligence (AI) market. The most important aspect of Amazon's business is that the company has always found new and promising avenues of growth.
Despite some failures, in the long run Amazon should succeed in finding new and exciting avenues of growth in AI, healthcare, and other areas. Amazon is not only a great stock to ride the current bull market, it's an equally great stock for investors looking beyond.
2. Airbnb
Airbnb's stock has lagged the market over the past year, but the company has generally posted strong financial results.
In 2023, the vacation rental platform recorded revenue of $9.9 billion, an 18% increase over the previous year. Airbnb's net income was $4.8 billion, more than doubling year over year, and its free cash flow at the end of 2023 was $3.8 billion, up slightly from $3.4 billion in 2022.
Why has Airbnb failed to keep pace with the broader stock market despite its strong performance? There are probably at least two reasons. First, the company has had to deal with new laws over the past year that affect its operations in notable locations such as New York. Second, Airbnb's stock looks expensive based on traditional valuation metrics.
ABNB PE Ratio (Forward) Data by YCharts
Perhaps the market was expecting even better results. However, these issues are not a deal breaker, at least for investors with a long-term perspective.
For one, Airbnb's ecosystem continues to expand. The company currently has over 5 million hosts and his 7.7 million listings. A key aspect of Airbnb's business is the platform's network effects, and the more its ecosystem grows, the stronger its economic moat becomes.
Meanwhile, Airbnb is leveraging a significant opportunity by entering an underpenetrated market. The company cites Germany, Brazil and South Korea as his three regions where he has recently achieved great results.
Airbnb is just getting started. Management also announced that it would move “beyond the core” and pointed to new growth opportunities. Airbnb hasn't revealed many details, but investors should be excited.
In my view, there is enough growth potential at the core of the company, and people aren't going to stop traveling anytime soon. Airbnb is one of the best and most popular platforms for travel arrangements. Adding more features to its core product could create significant opportunities.
Bottom line: Airbnb's recent poor performance doesn't need to scare investors. This stock remains a good buy-and-hold option.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Prosper Junior Bakinny has a position on Amazon. The Motley Fool has positions in and recommends Airbnb and Amazon. The Motley Fool has a disclosure policy.
