Long-term investing is the name of the game for those who dream big. To double a $3,000 investment is no easy feat in the blink of an eye, but history tells us that the steady and steadfast approach carries the day. It’s all about securing an average annual return in the ballpark of 12% over the next six years. It’s a realistic climb.
So, let’s cut to the chase. Find a solid business, buy the stock at a favorable price, and then sit back. That’s the winning strategy, plain and simple.
1. Alphabet
Internet giant Alphabet (NASDAQ: GOOGL), a member of the “Magnificent Seven,” has been a wellspring of prosperity for its stakeholders for over twenty years. The company is currently a cash-generating powerhouse with a simple recipe for consistent earnings expansion. Its ace in the hole is none other than its advertising enterprise. Google search and YouTube are the two most frequented places on the planet, wielding commanding audience numbers and potent monetization prowess.
For every dollar of revenue, Alphabet rakes in approximately $0.30 in free cash flow, which amounts to a hefty $77 billion in cash flow over the last year and a balance sheet stacked with $120 billion in cash reserves. The management is keen on share buybacks, trimming the outstanding shares by 10% over the past five years. Fewer shares translate to inflated earnings-per-share (EPS), thus bolstering stock price growth.
Alphabet’s bulging cash reserves all but guarantee continued fortification of organic growth through future share repurchases. Analysts are bullish on the company’s prospects, projecting an average annual earnings growth exceeding 17% over the long haul. That sets a cushion of five percentage points above our targeted 12% – a much-needed buffer for stock ownership.
Furthermore, the shares trade at a forward P/E of 24, a figure that may not scream bargain, but quite a reasonable assessment given the projected growth rate. This equates to a PEG ratio of 1.3. Anything below 1.5 is what I call attractive. Let’s spread the word on Alphabet – unless its fundamentals wane, investors stand to harness the company’s growth to meet the necessary 12% return for doubling their investment by 2030.
2. Netflix
Groundbreaking streamer Netflix (NASDAQ: NFLX) has stood tall as one of Wall Street’s prime achievers since its foray into the stock market in the early 2000s, notching over 39,000% in appreciation. No longer the diminutive, emergent bet it once was, Netflix now flaunts a whopping $210 billion market cap and boasts a paid subscriber base of some 247 million worldwide.
After years of losses, Netflix has turned the corner, investing heavily in self-produced content to reduce reliance on third parties, many of whom are rivals. The platform now owns a substantial portion of its content portfolio, some of which has claimed prestigious Emmy and Oscar awards. Presently, Netflix’s profits have outpaced its content outlay, making it a cash machine. Its free cash flow stands at $5.6 billion over the past four quarters with a robust 22% conversion rate.
Netflix has ceased tolerating password sharing, and the surge in its subscriber count has accelerated once again. Besides, Netflix has other avenues of growth to tap into, including global expansion and pricing strategies. Can Netflix envision tallying 400 million or even 600 million subscriptions someday? It’s within the realm of possibility as emerging markets amass discretionary income to afford streaming. Netflix’s footprint spans over 190 countries, positioning it to penetrate these markets over the upcoming years.
Analysts are buoyant about the future, anticipating an average annual earnings growth of over 23%. Even at a forward P/E of 39 and a slightly steep PEG ratio of 1.6, there is scope for Netflix’s valuation to taper off and still deliver a 12% annualized return on investment. Nothing is certain, but Netflix appears to be a plausible contender to double up by 2030.
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.