Day: October 6, 2024

Building wealth in the stock market is not complicated. It simply involves holding shares of consistently growing companies over many years. In the last decade, a small group of elite growth stocks became the default choice for investors looking to earn above-average returns. These became known as FAANG stocks, which include the following:

You can make a case for buying all of these stocks. They all have solid competitive advantages and favorable long-term prospects, although some offer more compelling return potential than others.

If you’re looking for the best FAANG stocks to beat the historical 10% return of the S&P 500 index, here are two I’d put my money on.

1. Amazon

Amazon is a large business with $604 billion in trailing-12-month revenue, but the company continues to grow at rates that can support market-beating returns.

Trailing-12-month revenue is up 12% year over year through the company’s second quarter (ended June 30), with the highest rates of growth coming from non-retail services like advertising and cloud computing. While revenue from online stores grew only 6%, Amazon’s efforts to lower costs, improve fulfillment efficiency, and speed up delivery could translate to further share gains in the e-commerce market.

Year to date, Amazon has delivered more than 5 billion units within one day. Faster shipping speed appears to be leading to the desired outcome, which is increasing order frequency, as management reported an acceleration in its everyday essentials business in the second quarter. This shows Amazon strengthening its competitive advantage in retail.

The efficiency gains in fulfillment are also leading to higher profits. Operating income nearly doubled in Q2 to $14.7 billion over the year-ago quarter. There are still plenty of opportunities to reduce costs, including expanding the use of automation and robotics and consolidating multiple orders to one box. The company could expand margins for several years, considering the growth opportunities in lucrative non-retail businesses like Amazon Web Services and advertising.

Analysts expect Amazon’s earnings to grow at an annualized rate of 22% in the coming years. Even allowing for a lower price-to-earnings (P/E) ratio over the next six years, Amazon investors could potentially double their money by 2030 and beat the S&P 500.

2. Netflix

Netflix has grown into a large entertainment business over the last decade with 277 million subscribers. But this doesn’t mean its return potential is over. The company is still growing revenue at double-digit rates and opportunities to grow profits by expanding margins make it a great stock to hold for the next six years.

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Netflix turned in stellar results in Q2 (ended June 30), with revenue and global paid memberships up nearly 17% year over year. The company continues to see a positive impact on subscriber growth from paid sharing, which is putting an end to password sharing among members and boosting revenue.

Netflix already earns industry-leading margins in entertainment, with an operating margin of 27% in Q2. Management is committed to increasing margins every year, but considering it’s very early in scaling its advertising business, there is a long runway of opportunity to grow profits.

Moreover, Netflix still has an attractive revenue growth opportunity. There are more than 1 billion broadband users worldwide, and more than 5 billion basic internet users. Netflix still has a small share of connected TV penetration, which could provide years of gradual growth in subscribers globally.

All told, Netflix can deliver solid growth for many years. Analysts expect Netflix’s earnings to grow 27% on an annualized basis, yet the stock trades at a forward P/E of 31 on 2025 earnings estimates — a reasonable valuation for this much earnings potential. Investors can expect Netflix stock to climb along with earnings, which should easily lead to market-beating returns through 2030.

Should you invest $1,000 in Amazon right now?

Before you buy stock in Amazon, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.

2 FAANG Stocks That Could Crush the S&P 500 Through 2030 was originally published by The Motley Fool

Palantir Technologies (NYSE: PLTR) and Nvidia (NASDAQ: NVDA) are two of the hottest artificial intelligence (AI) stocks on Wall Street. In fact, with year-to-date returns of 132% and 150%, respectively, they rank among the five best-performing components of the S&P 500.

However, Wall Street expects the stocks to move in opposite directions over the next year.

• Among the 23 analysts who follow Palantir, the median price target is $27 per share, which implies 32% downside from its current share price of $40.

• Among the 65 analysts following Nvidia, the median price target is $150 per share, which implies 20% upside from the current share price of $125.

Furthermore, Palantir is the most overvalued stock in the S&P 500 based on the difference between its current price and median price target. Meanwhile, according to FactSet Research, Nvidia ranks among the most highly recommended stocks in the S&P 500 in terms of its percentage of buy ratings.

Suffice it to say Wall Street is overwhelmingly bearish on Palantir but very bullish on Nvidia. Here are the most important details for investors.

Palantir Technologies: 32% downside implied by the median price target

Palantir has deep roots in counterterrorism and clandestine military operations. The company spent its earliest days building analytics software for federal agencies in the U.S. intelligence community. But it has since expanded its customer base to include international governments and commercial organizations.

Palantir’s data operations platforms, Foundry and Gotham, let customers incorporate data and machine learning models into analytical applications that improve decision-making. And its AI platform, AIP, allows commercial and government clients to use large language models and generative AI within Foundry and Gotham.

Some analysts have lauded Palantir for its sophisticated technology. For instance, it was a top-ranked vendor in Dresner Advisory Services’ 2024 market study on artificial intelligence, data science, and machine learning platforms. Forrester Research recently recognized its leadership in AI and machine learning platforms.

Other analysts are less impressed. Gartner scored Palantir below a dozen other vendors in data integration capabilities, citing overreliance on consulting services. That means some clients find Palantir’s software so complex that they struggle to use it independently. Gartner also omitted Palantir in its latest report on data science and machine learning platforms.

Palantir reported second-quarter financial results that exceeded expectations on the top and bottom lines. Revenue rose 27% to $678 million, the fifth consecutive acceleration in sales growth. Meanwhile, non-GAAP (generally accepted accounting principles) net income increased by 80% to $0.09 per diluted share. And management provided better-than-expected guidance for the third quarter.

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The only real problem with the stock is its valuation. Wall Street expects Palantir’s earnings to increase at 21% annually through 2026. That estimate makes the present valuation of 125 times adjusted earnings look absurdly expensive. As mentioned, Palantir is the most overvalued stock in the S&P 500 based on the discrepancy between its median price target and current price.

So, either Wall Street analysts have grossly underestimated Palantir, or shares are headed for a significant correction in the future. Either way, investors can save themselves a lot of trouble by avoiding Palantir stock right now, and shareholders should at least consider trimming their positions.

Nvidia: 20% upside implied by the median price target

Nvidia is best known for inventing graphics processing units (GPUs), semiconductors that perform technical calculations much faster and more efficiently than central processing units (CPUs). Nvidia GPUs are the gold standard in accelerating computationally demanding data center workloads like AI training and inference.

Last year, Nvidia accounted for 98% of data center GPU shipments, and the company currently has more than 80% market share in AI chips, according to analysts. That dominance is partially due to superior hardware. But it’s also a product of the company’s broad portfolio that spans adjacent hardware, like networking gear and server processors, as well as software and cloud infrastructure services designed to support AI workflows.

To quote Zoe Thomas of The Wall Street Journal, “Nvidia already dominates the market for chips powering the artificial intelligence boom. Now the company is playing a growing role in designing AI data centers.” That affords Nvidia an important competitive advantage. The company not only monetizes AI in multiple ways but can also provide customers with a complete AI system rather than individual components.

Nvidia reported strong financial results in the second quarter of fiscal 2025 (ended July 2024). Revenue increased 122% to $30 billion on strong demand for AI hardware and software. Meanwhile, non-GAAP earnings increased 152% to $0.68 per diluted share. Only one metric was moderately disappointing. Gross profit margin declined 3.3 percentage points sequentially, which may signal a slight weakening in pricing power due to increased competition from other chipmakers.

Going forward, Wall Street expects Nvidia’s adjusted earnings to increase at 35% annually through fiscal 2027 (ends January 2027). Compared to that estimate, the current valuation of 56.6 times adjusted earnings is fair and certainly much more reasonable than Palantir’s price tag. Patient investors should consider buying a small position in Nvidia stock today and building a slightly larger position if shares fall 10% to 20% in the future.

Should you invest $1,000 in Palantir Technologies right now?

Before you buy stock in Palantir Technologies, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

Palantir Stock vs. Nvidia Stock: Wall Street Says Sell One and Buy the Other was originally published by The Motley Fool

One for you, two for me. $6.75 billion for you … $9.5 billion for me.

For the longest time, the U.S. Navy has been dependent upon just two large military shipbuilders to build the bulk of its fleet: General Dynamics (NYSE: GD) and Huntington Ingalls (NYSE: HII). Essentially every submarine and destroyer in active service in the Navy today came from one of these companies. Beyond those two classes, General Dynamics also builds fuel replenishment ships and various other support vessels for the Navy, while Huntington Ingalls handles the construction of aircraft carriers and amphibious assault ships.

But while the Navy tries to divide its shipbuilding contracts between these two giant defense contractors roughly down the middle, sometimes it doesn’t work out that way.

A shipbuilding duopoly for Uncle Sam

Last month, for example, the U.S. Navy awarded General Dynamics a sole-source contract to build it eight John Lewis-class fleet replenishment oilers — vessels that refuel and resupply other ships while they are underway. All of those new oilers, hull numbers T-AO 214 through T-AO 221, are scheduled to be delivered by January 2035. The total value of that contract ran to $6.8 billion — and Huntington Ingalls wasn’t so much as asked to submit a bid on it. As the Pentagon explained in its contract announcement, “this contract was not competitively procured” — they just handed it to General Dynamics on a silver platter.

Some Huntington Ingalls shareholders might have been a bit miffed at that, but they shouldn’t have been. Just a couple of weeks later, Huntington Ingalls got two construction contracts of its own. At least one of these was also “not competitively procured,” and when combined, they add up to much more money than General Dynamics will get for the oilers.

Huntington Ingall’s new contracts

Valued at $5.8 billion, the first contract tasks Huntington Ingalls with designing and building three “Flight II” amphibious transport dock ships for the Navy, with hull numbers LPD 33, LPD 34, and LPD 35. Also known as landing platform docks (hence the “LPD” designation), these vessels specialize in transporting troops, landing vessels, and helicopters to theaters of conflict, there to disgorge them upon hostile shores.

Each Flight II vessel will be able to carry hundreds of marines and their equipment, along with a combination of up to four helicopters or V-22 Osprey vertical take-off and landing aircraft, as well as a combination of up to two “LCAC” landing hovercraft and or up to 14 amphibious assault vehicles.

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Separately, Huntington Ingalls was awarded a $3.7 billion contract to begin work on building a new Flight I America-class amphibious assault ship. Also known as a landing helicopter assault ship (and LHA), this type of warship resembles a small aircraft carrier in appearance. According to Huntington Ingalls, in addition to carrying a Marine complement nearly three times as large as that on an LPD, a typical LHA might be equipped with five F-35B short take-off and landing stealth fighter jets, a dozen V-22s, a half dozen attack helicopters, and a half dozen search and rescue and transport helicopters.

What it means to investors

Armaments aside, what’s most interesting about these contracts to investors is the fact that, combined, Huntington Ingalls has just been awarded contracts worth about 50% more than those that General Dynamics won two weeks earlier.

That alone sounds pretty good, but the news gets even better when you realize that Huntington Ingalls is a much smaller (and more maritime-focused) company than General Dynamics, which is more of a defense contracting conglomerate, with businesses operating on land, air, and sea. This magnifies the importance of a large contract win for a (relatively) small company.

Huntington Ingalls carries a market capitalization of just $10.2 billion — a small fraction of General Dynamics’ $83.4 billion-plus market cap. What’s more, Huntington Ingalls’ has $11.8 billion in annual revenue, which makes it comfortably cheaper than my usual target valuation for defense contractors of 1.0 times sales. Huntington Ingalls is, in fact, valued at a bit less than 0.9 times sales — while General Dynamics today has a valuation of 1.9 times sales.

And now, in a single day, Huntington Ingalls has gained contracts worth nearly a full year of revenue.

Suffice it to say that, when evaluating defense stocks for future investment, Huntington Ingalls stock just moved to the top of my list. I’ve got nothing to say against General Dynamics as a company, but HII stock just looks like a better value to me.

Should you invest $1,000 in Huntington Ingalls Industries right now?

Before you buy stock in Huntington Ingalls Industries, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Huntington Ingalls Industries wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $752,838!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Huntington Ingalls Lands $9.5 Billion in New Navy Warship Orders was originally published by The Motley Fool