Ignore Amazon: Here Are 3 Better Stocks

FAN Editor

In September, Amazon joined Apple in the exclusive $1 trillion valuation club. There could be more gains ahead for the e-commerce and cloud-computing giant, but after a 70% run so far in 2018, some investors might feel like they’re chasing returns by buying into the high-flying stock at this point.

If you feel like you’ve missed the boat, that’s OK; there are lots of potential $1 trillion club candidates out there. Instead of buying one of this year’s biggest winners after the fact, considering taking positions in Shopify (NYSE: SHOP), iQIYI (NASDAQ: IQ), and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) instead.

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A different take on digital commerce

While Amazon built itself on its online retail marketplace, Shopify has taken a different approach: it’s a retail platform. The software company boasts over 600,000 merchants using its online site building and management tools and payment services — from small aspiring entrepreneurs to big global enterprises. Amazon allows merchants to sell goods on its marketplace, but Shopify is a promoter of the entrepreneurial spirit, helping businesses set up and promote their own marketplaces.

The stock also has been a big winner, up over 470% on the back of a 400% rise in revenue the last three years. However, while 2018 got off to a strong start, shares have fallen nearly 20% from their peak because of “disappointing” second-quarter results. Year-over-year revenue was up 62%, putting full-year revenue on track to top $1 billion for the first time.

Even though the top-line growth is impressive, shares are down because Shopify’s $15.7 billion valuation assumes growth will continue at an aggressive pace for some time to come. The company is still young, though, and it’s funding experimentation to promote future expansion. It can do so because it generated a 56.8% gross profit margin on its software and merchant solutions through the first half of the year.

Thus, challenges could lie ahead, but this is the case for every company with big aspirations. For investors looking further down the road, though, now looks like a good time to pick up some shares.

China binges TV, too

Amazon has made a name for itself the last few years with its video-streaming services akin to Netflix. The company isn’t alone in its aspirations to tap the entertainment industry, though. Across the Pacific is internet streaming service iQiyi (pronounced eye-CHEE-yee), the country’s biggest online entertainment company in terms of monthly average users and average time spent watching TV.

iQiyi spent its formative years under the guidance of Baidu, which still owns a controlling interest after iQiyi shares debuted in the spring of 2018. Though the company looks a lot like a typical TV service with third-party and internally produced content, there’s a lot more going on under the hood. iQiyi created a unique revenue-sharing model with its video artists, paying them based on how big of a blockbuster they create. Advertising, social media, distribution, and video games round out the company’s money-making abilities.

The model is working. At the end of the second quarter, total subscribing members had grown to 67.1 million, a 75% year-over-year increase, and revenue increased 51%, to $932.5 million. However, it’s worth noting that, like Shopify, iQiyi runs at a loss, as it’s sacrificing profits now for a bigger payoff later. That can cause a great deal of volatility, but a similar strategy helped propel Amazon to market leadership.

Speaking of volatility, that’s a reason to consider iQiyi now. After a hot start when it IPO’d, shares have been in decline since the early summer and are down 40% as of this writing. That downtrend could continue, but with a market cap of just $21 billion and a huge and still growing Chinese entertainment industry to conquer, the stock looks like a good one to bet on for the long haul.

The next $1 trillion club member?

There are other companies flirting with the 13-digit milestone. My pick to join Amazon and Apple is Google parent Alphabet, currently sitting at a market cap of $823 billion. If it gets there within the next few years, it would be the fastest company to ever reach the $1 trillion mark. (Amazon was founded in 1994, Google in 1998.)

That seems like a probable occurrence. Google has the wind at its back and turns an even bigger profit than Amazon does — trailing 12-month free cash flow is $19.7 billion to Amazon’s $8.8 billion. Revenue and earnings (excluding a one-time European Commission fine) growth have been re-accelerating this year, increasing 26% and 32%, respectively, during the second quarter.

Online advertising still is Google’s bread and butter, but the company is making headway in other data-centric areas like cloud-based software services. The Other Bets segment houses dozens of incubator-level ideas and start-ups, from smart home devices to autonomous cars. With lots of self-funded irons in the fire, there’s a good chance a new business will emerge to help keep momentum rolling at Alphabet.

Like the other stocks mentioned, shares of Alphabet also have pulled back recently, down nearly 10% from the all-time highs reached earlier in the summer. The company’s forward price-to-earnings ratio is 24.5, a reasonable valuation for a company posting better than 30% bottom-line expansion. One trillion dollars may not seem too far off, but a run-up to that valuation would still be a 20% gain from current prices. If Google’s online business can keep up its recent pace, that’s not a far-fetched expectation.

Amazon’s success has been a game changer for long-term shareholders, but investors who missed getting in early need not feel left out. Shopify, iQIYI, and Alphabet all look like good candidates capable of putting up big returns, as well.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (A shares), Alphabet (C shares), Apple, and Shopify. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Baidu, Netflix, and Shopify. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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