Long-term investing holds an inherent allure. It transforms ambitious financial goals into attainable targets. Consider an investment of $3,000, with the aim of doubling it. This is a challenging feat over a brief period, due to the capricious nature of stocks in the short term.
However, over time, underlying business fundamentals tend to assert themselves. The math is instructive. Doubling an investment by 2030 requires an average annual return of 12% over the next six years. Suddenly, the aspiration seems quite realistic, doesn’t it?
In essence, finding a solid business, purchasing its stock at a reasonable price, and exhibiting patience is the crux of the strategy.
Here are two stocks that fit the criteria.
Alphabet: An Advertising Juggernaut
Alphabet (NASDAQ: GOOGL), a member of the “Magnificent Seven,” is an internet giant that has generated substantial wealth for its shareholders over the past two decades. The company, known for its Google search engine and YouTube video platform, has honed a proven formula for consistent earnings growth, with its advertising business serving as its golden goose. Both Google and YouTube rank as the two most visited websites on the planet, offering a vast and well-monetized audience.
Alphabet derives approximately $0.30 in free cash flow for every revenue dollar it generates. This translates to a remarkable $77 billion in cash flow over the past year, with $120 billion in cash reserves on its balance sheet. The company has undertaken share repurchases, reducing its outstanding share count by 10% over the past five years. This reduction sustains earnings-per-share (EPS) growth, thereby supporting the appreciation of its share price.
GOOGL PE Ratio (Forward) data by YCharts
Analysts predict a long-term annual earnings growth rate of over 17% for Alphabet. This not only clears the targeted 12% by a significant margin but also provides a margin of safety. Furthermore, with a forward P/E of 24, which is a fair valuation considering the expected growth rate and a PEG ratio of 1.3, investors are poised to realize the company’s growth as investment returns, potentially doubling their investment by 2030.
Netflix: Reigning as a Streaming Pioneer
Streaming giant Netflix (NASDAQ: NFLX) has emerged as one of the top performers on Wall Street since its IPO in the early 2000s, with its stock appreciating by over 39,000%. Sporting a market cap of $210 billion, Netflix boasts approximately 247 million paying subscribers globally.
After years of losses, the company effectively invested in and developed its content portfolio, diminishing its reliance on third-party content providers. Netflix now owns a substantial portion of its platform’s content, some of which has even garnered Emmy and Oscar awards. Its profits have outpaced its production budget, rendering it a cash cow today, with a solid $5.6 billion in free cash flow over the past four quarters, reflecting a robust 22% conversion rate.
NFLX PE Ratio (Forward) data by YCharts
With a resurgence in subscriber growth following the cessation of password sharing, Netflix still has room to grow. International expansion and potential price hikes are among the levers Netflix can pull for further growth, especially in emerging markets where discretionary income is on the rise. Analysts foresee average long-term annual earnings growth of over 23%, positioning Netflix as a feasible contender for doubling in value by 2030, despite a touch expensive forward P/E of 39 and a PEG ratio of 1.6.
Consider Your Investment Carefully
Before diving into an investment in Alphabet or Netflix, it’s critical to weigh the potential risks and rewards associated with each stock.
*Stock Advisor returns as of December 18, 2023
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Netflix. The Motley Fool has a disclosure policy.
