While some investors are looking for dividend stocks and others are looking for low-priced growth stocks, there is money to be made in blue-chip stocks like Amazon (NASDAQ:AMZN) and Alphabet Inc. (NASDAQ:GOOGL).
In fact, here are three big reasons to consider investing in Amazon and Alphabet today.
Reason #1 – Hyper Growth Engines
Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are not blue chip stocks whose best days are behind them. These are stocks that are continuing to post impressive growth today.
It is not unexpected that since 2004 Amazon and Alphabet have produced astounding 26 percent yearly returns.
These businesses won’t likely expand as quickly as they did in the past, but analysts still predict phenomenal income growth of 17.5% annually in the future.
Inflation, tax adjustment, and historical risk of these companies not developing as anticipated are all taken into account, and the result is a very healthy long-term real predicted income increase of 8%.
Reason #2 – Both Are Likely to Become Dividend Stocks
A dividend from Amazon and Alphabet becomes practically mathematically certain if both firms experience anticipated continued growth.
By 2027, Alphabet’s cash reserves are projected to have increased from $21 billion to $435 billion. That amounts to a $315 billion net cash position after deducting its small debt and various working capital needs.
To put things in perspective, Apple (NASDAQ:AAPL) began paying dividends when its cash position (not even net cash) reached $250 billion.
Alphabet (NASDAQ:GOOGL) is such a cash generator that it generates free cash flow at a rate of 114 percent of earnings.
The growth spending for Alphabet in 2022 alone will be greater than the GDP of all but 59 nations on the planet.
By 2027, it is expected to produce $2.4 trillion in revenue and free cash flow (FCF) of $544 billion.
What does that imply for possible dividends and buybacks?
Alphabet’s consensus retained free cash flow through 2027 is sufficient to possibly repurchase 38% of the company’s shares at the market price.
It is anticipated that Alphabet will buy back enough shares to increase its FCF/share by 26% annually.
Amazon (NASDAQ:AMZN), what about it?
The consensus predictions, in this case, are even more unbelievable.
By the end of 2027, analysts forecast that Amazon’s net cash position will have increased by 73 percent yearly, totaling $239 billion. Expected cash amounts total $465 billion. That is greater than the GDP of all countries on Earth except for 24.
Amazon has one of the highest cash conversion rates of any corporation, converting 136 percent of net income into free cash flow.
By 2027, it is anticipated to earn $4.4 trillion in revenues, $310 billion of which will be free cash flow. It is projected to produce $162 billion in free cash flow in 2027.
Analysts predict that Amazon (NASDAQ:AMZN) will increase its free cash flow in 2027 by 27% from a base of $128 billion in 2026.
At current prices, Amazon’s $310 billion in retained free cash flow could be used to repurchase 25% of its outstanding stock. What kind of buyback budget are analysts genuinely anticipating from Amazon?
Analysts predict that until 2024, Amazon would use only 45 percent of its $10 billion buyback authorization, spending an average of $1.5 billion year on repurchases.
Reason #3 – Both Stocks Currently Seem Undervalued
After communications stocks plummeted last week, Alphabet (NASDAQ:GOOGL) is trading near its low while Amazon (NASDAQ:AMZN) is up 18% from the market low set on June 16th.
What does that imply for prospective investors in the two businesses?
- Alphabet is Historically Undervalued by 30%
According to Morningstar’s discounted cash flow model, Alphabet (NASDAQ:GOOGL) is currently 40% undervalued and should increase in value by 67 percent to its fair value of 30X earnings.
According to analysts, Alphabet will deliver a total return of 41% in 12 months at a price of 23.6X earnings.
Investors will get a 24 percent yearly return if Alphabet expands as anticipated through 2024 and returns to its historically determined market-determined 25.6X earnings.
What about Amazon (NASDAQ:AMZN) then?
- Amazon Is 43% Historically Undervalued
Amazon is currently trading at a historical discount of 43 percent, or about 14.8X, compared to its historical value of about 26X operating cash flow.
The bottom line is both of these stocks appear to present exciting opportunities for investors and thus should be researched further.
Featured Image: Megapixl @M-sur
