The Nasdaq 100 has had a huge run since the pandemic hit the stock market. Most investors want a share of this stock, but high valuations and market volatility might keep you from diving into the overall index.
Still, some of the big Nasdaq stocks are great candidates for long-term investors or retirement accounts. These two can offer a combination of stability and growth to fuel your portfolio over the long term.
Amazon (NASDAQ: AMZN) It might seem like an obvious inclusion here, but let’s take a moment to dissect why it’s a stock you can hold in your portfolio for years to come.
A leader in the highly fragmented e-commerce world, Amazon holds around 40% of the US market and nearly 8% of the global market.
It is almost certain that online sales will continue to increase as a percentage of total retail sales, and the overall e-commerce market is expected to grow by around 10% over the next few years.
The company will certainly experience increased competition from all angles. All kinds of physical retailers have emerged from pandemic closures with strong digital commerce channels. Small direct-to-consumer sellers and niche markets are able to carve out a niche in the market through Shopify and other benefits.
Even with this competition, Amazon’s market share and competitive advantages are so large that it would take a long time for its e-commerce segment to lose value.
But Amazon is not just an online retailer. Prime Video is one of the top three streaming services, with 175 million people streaming video in the past year. Amazon Web Services (AWS) is the global leader in cloud infrastructure services, with over 30% market share. AWS contributed over 13% of the company’s total revenue last quarter, so it’s a big part of the story that’s likely to get even bigger. Amazon is even a major player in the grocery store landscape, having acquired Whole Foods and its 500 stores in 2017.
It would take too much for Amazon to fail in the short term. It is not a product that can become obsolete, it has become a diverse giant, and its scale creates advantages over its more capable competitors.
Amazon’s competitive advantage and economic divide is also significant. Return on invested capital (ROIC) measures the efficiency with which a company can use its financial assets to generate profits. Amazon’s 16% ROIC is pretty high, especially for a company that prioritizes growth over short-term earnings. This indicates a wide gap. It is also proof of effective pricing and trading power.
Amazon also has more than just stamina – it’s still a decent growth game. Its days of explosive expansion are in the rear view mirror, but the forecast still calls for 20% growth over the next several years. This is on the heels of last year’s 30% growth, fueled by consumer home shopping and increased adoption of cloud computing. This forecast makes Amazon’s forward price-to-earnings (P / E) ratio of 45.6 to look much cheaper, with a more modest price-to-earnings-growth (PEG) ratio of 2.28.
Given its massive size, Amazon is unlikely to be the top performing stock over the next decade. This stock will likely be owned by a small cap stock that emerges to compete with the big ones. However, Amazon is still expected to overtake the market while providing enviable stability.
Costco (NASDAQ: COT) is not an exotic technological value with unlimited growth potential. However, it is a good candidate to generate constant growth that can overtake the market.
With more than 800 stores in North America, Europe, Asia and Australia, Costco sells a wide variety of consumer staples like groceries, housewares and clothing. It also carries expensive cyclical items such as electronics, furniture, and appliances.
Costco has done a great job over the past few years to develop its e-commerce sales channel, which helps drive overall growth. It’s a really diverse retailer, which is great for stability. Costco’s wholesale approach and warehouse-store model also allows it to offer some of the best prices in the market, so the chain tends to perform well during recessions when households are cutting back on spending and are looking for value.
Even more exciting for investors, Costco operates with a club membership model. Customers must pay an annual subscription for the right to shop. These expenses were equivalent to nearly 58% of the company’s operating profit in the most recent fiscal year, so they contribute significantly to the bottom line. With over 90% member retention, Costco clearly demonstrates its value to consumers, and its cash flow is much more predictable than that of retailers who rely solely on the sale of merchandise.
Much like Amazon, Costco has an impressive ROIC of 18.2%. This further validates the stability argument, even in a highly competitive environment. Investors should also be drawn to Costco’s growth potential. The chain has averaged over 10% annual sales growth in recent years and is expected to maintain an 8% growth rate over the next two years. You won’t get this from Walmart, Target, Where BJ.
Costco stock is quite expensive with a forward P / E ratio of 38 and an enterprise value / EBITDA ratio of 23. This opens the door to slightly larger losses during market declines, as is. generally the case for high valued stocks. Yet these ratios are not high enough to deter me from a long term investment. Costco should easily achieve this valuation if you give it enough time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.