Innovation and business ingenuity are powerful wealth-creating forces that you don’t want to miss out on. The stock market has been riddled with numerous ups and downs over its history, and while that causes a lot of stress and worry for retirement savers, the long-term growth of a business is all that matters.
Amazon (AMZN -0.43%) and Advanced Micro Devices (AMD -0.45%) are two growing companies that are soundly beating the market in 2023. Amazon is already up 23%, while Advanced Micro Devices is up 32%. Here’s why investors shouldn’t hesitate to take advantage of these long-term compounding machines before the eventual bull market gets underway.
1. Amazon: E-commerce is a surefire megatrend to bet on
Online shopping has come a long way over the last 20 years, but it still makes up a small amount of total retail spending in the U.S. Morgan Stanley expects physical store closures and the desire for convenience to push e-commerce spending to 31% of retail sales by 2026, up from 23% today. With a growing base of over 200 million Prime members, this is a big opportunity for Amazon’s retail business.
Even after the recent fall, the stock is up 57% over the last five years, slightly outperforming the S&P 500 index. The stock is down from all-time highs for several reasons, including slowing growth coming out of the strong demand during the pandemic, higher capital spending, lower profits, and concerns about the negative consequences of a recession.
However, Amazon is already starting to see its top-line growth stabilize. In the fourth quarter, currency-adjusted sales growth came in at 12% over the year-ago quarter, beating analysts’ estimates. That is 68% higher than Amazon’s sales in the same quarter three years ago and 690% higher than a decade ago.
Amazon accelerated its capital spending over the last few years, a good indicator of where the business is headed. Historically, Amazon’s increase in capital expenditures has translated to higher revenue and growing operating profits. That reflects the large amount of untapped opportunity in the multi-trillion e-commerce market. These investments are expanding selection, shipping speed, and service offerings to win over more customers and generate returns for shareholders.
One new service that could prove very lucrative is Buy with Prime. Amazon introduced this last April. It allows merchants to offer free Prime shipping and seamless checkout through their own web stores. Morgan Stanley analyst Brian Nowak said he believes that Buy with Prime could add as much as $3 billion in operating profit by 2025. That’s roughly a quarter of Amazon’s trailing-12-month operating profit of nearly $13 billion.
Amazon continues to find ways to stay ahead of the competition and capture the trillions in retail spending that will come online in the coming decades. This is why the stock should grow in value for a long time.
2. AMD: A bet on the digitization of the global economy
Advanced Micro Devices could deliver multi-bagger returns from its current share price level. The company is a leading chip supplier for data centers, consumer PCs, and video game consoles. These core markets drove exceptional growth over the last five years, sending the stock up 549%. But with the shares trading significantly lower after the market sell-off, the market is undervaluing the company’s role in the future of an increasingly digital world.
Last year AMD’s data center and embedded processor sales more than doubled to $10.6 billion. It closed the year strong by reporting a 42% year-over-year increase in data center, driven by strong adoption of its EPYC server chips. Data center and embedded chips make up over half of the business, which helped offset lower results on the consumer side related to softness in gaming.
The stock fell with the broader market last year over concerns about slowing growth in the gaming business, where AMD not only supplies graphics cards to PC gamers but is also the supplier of custom processors for Sony‘s PlayStation 5 and Microsoft‘s Xbox Series X/S.
While gaming is still an attractive long-term opportunity that should eventually recover, the market is undervaluing AMD’s recent acquisition of Xilinx.
Xilinx expands AMD’s product offering to field-programmable gate array (FPGA) chips, which are experiencing growing demand in various markets like wireless networking, transportation, the Internet of Things, and other artificial intelligence applications.
Across data center, consumer PCs, embedded chips (Xilinx), and gaming, AMD is looking at an estimated $135 billion addressable market opportunity based on company estimates.
The stock hit a conservative valuation of less than 20 on a forward price-to-earnings basis. Investors who buy today could be in for an exciting ride over the next 10 years.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has positions in Amazon.com. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.