Over the long run, Wall Street is a money machine that rewards the patient. But in the short run, the stock market can undergo some dizzying downside moves.
Since the three major U.S. indexes hit their respective all-time closing highs between mid-November and January, the iconic Dow Jones Industrial Average, benchmark S&P 500, and growth-driven Nasdaq Composite lost as much as 19%, 24%, and 34% of their value. With these losses, the S&P 500 and Nasdaq both firmly fell into a bear market.
Although these bear market declines can be scary, they’ve historically been the perfect time to scoop up high-quality growth stocks at a discount. Perhaps no group of fast-paced stocks is riper for the picking than megacap growth stocks. The following three gargantuan growth stocks all have the tools and intangibles necessary to turn a $350,000 investment from patient investors into $1 million by 2030.
The first mammoth growth stock with the ability to nearly double a $350,000 investment in eight years is Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), the parent company of internet search engine Google and rapidly growing streaming platform YouTube.
With the U.S. economy retracing in back-to-back quarters, according to first-and-second-quarter gross domestic product (GDP) readings, the fear among Wall Street and investors is that Alphabet’s ad-driven operating model will suffer. While there’s no question that advertising revenue is likely to come under pressure in the near-term, there are clear competitive advantages and reasons as to why Alphabet has grown into one of the largest public companies in the world.
Alphabet’s foundation continues to be internet search engine Google. With the exception of the early stages of the coronavirus pandemic, which led to lockdowns, Google has consistently grown its ad revenue by a double-digit percentage for more than two decades. Over the past 24 months, Google has accounted for 91% to 93% of global internet search share, per GlobalStats. That’s pretty much monopoly status, and it affords Alphabet exceptional ad-pricing power.
Looking further out, it’s Alphabet’s ancillary growth opportunities that are more exciting. YouTube has bloomed into the world’s second most-visited social media site, with 2.56 billion monthly active users. On an annual run-rate basis, YouTube is pulling in more than $29 billion in ad revenue, and this doesn’t even count what it’s making from subscriptions.
There’s also cloud infrastructure service segment, Google Cloud. Cloud service growth is still in its early innings, with Google Cloud delivering 36% year-over-year sales growth during an exceptionally challenging second quarter. While still a money-losing segment for Alphabet, the high margins often associated with cloud could play a key role in doubling the company’s operating cash flow by 2025.
Put simply, Alphabet has never this been this inexpensive relative to Wall Street’s forward-year earnings forecast or cash flow projections.
A second gargantuan growth stock that’s fully capable of turning a $350,000 initial investment into a cool $1 million by the end of the decade is Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B).
Although Berkshire Hathaway isn’t exactly a household name like Google or YouTube, its billionaire CEO certainly is. Warren Buffett has held the reins at Berkshire for more than 57 years, and over that time he’s averaged… averaged… a 20.1% annual return on his company’s Class A shares (BRK.A). For you math-phobes, we’re talking about a 3,641,613% return, through Dec. 31, 2021.
What makes the Berkshire Hathaway growth story so unique is that Warren Buffett has built up his company via investments and acquisitions. It’s effectively a parent company that’s collected over five dozen businesses via acquisition (prime examples include insurer GEICO and railroad BNSF), and currently has a more than 50-security investment portfolio worth nearly $345 billion. This mix of organic and inorganic activity is what’s fueled relatively steady annual earnings growth that regularly hits the double digits.
One of the simple keys to Warren Buffett’s success is his love of cyclical businesses. The Oracle of Omaha is keenly aware that recessions are an inevitability. Rather than trying to time when they’ll occur, he’s content buying great businesses and holding them for extended periods of time. Because economic expansions last considerably longer than recessions, Berkshire Hathaway is able to benefit from the natural and steady long-term expansion of the U.S. and global economy.
Furthermore, Buffett’s company has turned into a real dividend-collecting machine. Over the next 12 months, Berkshire should bring in more than $6 billion in passive income, with a few companies accounting for the lion’s share of these payouts. Dividend stocks are known for outperforming their non-dividend-paying peers over long stretches.
One final thing to note about Berkshire Hathaway is that Warren Buffett and his right-hand man, Charlie Munger, love to buy back their own company’s stock. The more than $61 billion worth of Berkshire stock purchased in less than four years can provide a nice lift to earnings per share and boost shareholder value.
A third gargantuan growth stock that can turn $350,000 into $1 million by 2030 is e-commerce kingpin Amazon (NASDAQ: AMZN).
Similar to Alphabet, there’s genuine worry about how well a company so seemingly dependent on retail sales is going to fare after two consecutive quarters of a U.S. GDP retracement. However, if you dig beneath the surface, you’ll realize that Amazon’s ancillary operating segments are far more important than its retail sales.
For many, the word “Amazon” can be associated with the company’s leading online marketplace. When I say “leading,” I mean a company that, by itself, will account for an estimated 39.5% of all U.S. online sales in 2022, according to eMarketer. That’s 8.5-percentage-points more than the next 14 competitors on a combined basis.
But what’s been key about Amazon’s retail segment isn’t its aggregate low-margin revenue. Rather, it’s the more than 200 million high-margin Prime subscriptions from people all over the world. These subscriptions allow Amazon to collect tens of billions of dollars each year, which it puts to work in its logistics network or in other high-growth initiatives.
Speaking of high-growth initiatives, Amazon Web Services (AWS) is the world’s leading cloud-service provider. According to Canalys, AWS brought in a third of global cloud spending in the first quarter. Despite a challenging second quarter, AWS generated $5.7 billion in operating income on $19.7 billion in annual sales (33% year-over-year growth). Even though AWS consistently accounts for only around 15%-16% of Amazon’s net sales, it’s responsible for the vast majority of the company’s operating income.
The key point here is that even if Amazon’s retail segment were to stall or shift into reverse, the considerably higher margins associated with its subscription, advertising, and cloud segment could triple its operating cash flow by mid-decade.
Throughout the 2010s, investors were perfectly willing to pay a multiple of 23 to 37 times cash flow to buy Amazon stock. You can do the same today for less than 10 times Wall Street’s forecast cash flow for 2025.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet (A shares) and Amazon. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.