These two stocks look like winners with plenty of room for growth.
Many of us have a lot of things hidden in the back of our closets that we hope to use again someday (everything from a used bowling ball to a jacket that might come back in style one day). But what about investments?
Investment advice is sometimes used that says it’s a good idea to buy certain stocks and “keep them in the closet.” This is basically the same thing. Effectively, it means buying and holding for the long term.
A buy-and-hold strategy works great when it comes to more iconic companies. For example, if you invested $5,000 in Microsoft 10 years ago and it “stayed in the closet,” that initial investment would have grown to $56,050 (including dividends) 10 years later. This is a compound annual growth rate of 27%.
High-performing closet investments like this are somewhat rare, and no one knows if an investment made now will produce such impressive results in 10 years. However, some analysis can help you make educated guesses. Here are two suggestions for potentially good buy-and-hold stocks.
1. Airbnb
The travel industry has bounced back impressively from the damage caused by the coronavirus pandemic, and the short-term rental industry is booming. Global revenues in 2024 are expected to reach $100 billion, an 18% increase over 2019, and are expected to grow steadily over the next few years (see chart below).
Chart by Statista.
Expanding market opportunities make Airbnb (ABNB 0.63%) stock attractive. The company’s financial results are also excellent. He was forced to slim down due to the coronavirus pandemic, but it never returned.
Thanks to the company’s efficiency efforts, cash flow and profits are skyrocketing. Free cash flow for the trailing 12 months was $4.4 billion, with revenue of $10.5 billion and a margin of 41%.
ABNB Free Cash Flow Data by YCharts.
Thanks to its massive free cash flow, Airbnb maintains a fortress balance sheet with $11.3 billion in cash and investments, compared to just $2 billion in long-term debt. Additionally, the company has repurchased $2.8 billion of stock over the past 12 months, representing 3% of its current market capitalization. This includes $750 million in the second quarter.
Stock buybacks reduce the number of shares outstanding and increase earnings per share, which typically supports higher stock prices. Management expects share repurchases to continue under the current $6 billion authorization.
The biggest risk to Airbnb is regulation. Local governments and homeowners associations are not always willing to accommodate short-term rentals. This problem is unlikely to go away, so Airbnb should continue to work with communities to promote common-sense short-term rental regulations that don’t outright ban them.
Airbnb stock trades at 20 times free cash flow, the same as Booking Holdings (see chart below).
ABNB Price vs. Free Cash Flow data by YCharts.
This makes sense, as both companies enjoy excellent cash flow, enviable profit margins, and the ability to buy back large amounts of their own stock.
Airbnb’s growth plans include expanding into underserved global markets, promoting experiences (like gourmet tours), upgrading the platform and apps, and promoting the benefits of hosting to ensure sufficient supply. That is included. When you put the market, performance, and growth opportunities together, Airbnb looks like a great buy-and-hold stock.
2.Amazon
A $5,000 investment in Amazon (AMZN 0.90%) 10 years ago is now worth more than $61,000, an even better return than Microsoft. But just because it’s been so successful over the past decade doesn’t mean its strong performance won’t continue. Amazon is expected to benefit greatly from artificial intelligence (AI).
Amazon Web Services (AWS), the world’s largest cloud service provider, still has a long way to go to grow, with high demand for data processing power and storage to handle the massive requirements of AI software. This is already happening, with AWS revenue growth accelerating from 12% year over year in Q2 2023 to 19% ($26 billion) in Q2 2024.
Last quarter, total sales reached $148 billion with solid 10% growth. Revenue and operating cash flow for the past 12 months have once again reached new highs (see below).
AMZN Revenue (TTM) data by YCharts.
The company is firing on all cylinders, thanks in part to industry tailwinds.
Amazon is building AI services through Amazon Bedrock. This allows customers to create their own AI tools based on existing underlying models. Amazon has developed its own AI chips and accelerators and has the expertise and resources to become one of the leading companies competing with other Big Tech companies in this space.
In terms of valuation, the market does not seem to be fully pricing in the potential of AWS acceleration and AI, as Amazon is undervalued based on average operating cash flow and revenue over the past 5 and 10 years. .
Amazon used to be a great stock to have in your closet, and it still is. If you have $5,000 or any other amount, splitting it up between these two great companies and keeping it in your investment closet is a great choice.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Bradley Guichard has held positions at Airbnb, Amazon, and Booking Holdings. The Motley Fool has positions in and recommends Airbnb, Amazon, Booking Holdings, and Microsoft. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
