This has been an exceptionally volatile year for the stock market, and the popularity of online investing app Robinhood is a testament to this fact.
Robinhood, which is best known for offering commission-free trades and giving free shares of stock to new members, has been particularly adept at attracting young and/or novice investors to invest in equities. The typical Robinhood investor is 31 years old and very much drawn to the volatility we’ve witnessed since February. While encouraging young people to put their money to work in the stock market is fantastic, Robinhood hasn’t given its members the tools or education necessary to successfully invest for the long term.
Despite this, some Robinhood members appear to have latched onto a handful of stocks that look like surefire winners. As long as investors think long term, the following three stocks should deliver handsome returns.
Millennials and Generation Z have probably come across Square’s bread-and-butter revenue-generating platform at some point as consumers. Square provides point-of-sale devices and other tools necessary to help small businesses process transactions and grow. Between 2012 and 2019, the gross payment volume (GPV) traversing its network has catapulted from $6.5 billion to $106.2 billion. That’s a compound annual growth rate of 49%.
Even though Square’s seller ecosystem has taken a hit in 2020 due to the coronavirus pandemic, we’ve also witnessed a surprising and welcome shift in the businesses utilizing Square’s platform. Specifically, larger businesses (those with GPV of at least $125,000) now make up 52% of total GPV in Square’s seller ecosystem. This segment is driven by merchant fees, so bigger business involvement would be a shot in the arm for organic growth.
Robinhood members may also have firsthand experience with what I believe will be Square’s biggest growth driver in the years to come: Cash App. At the end of June, Square tallied more than 30 million Cash App users, which is up from 7 million at the end of 2017. Of these 30 million users, about 7 million are using Cash Card, a traditional debit card that links to a Cash App user’s account.
Ultimately, Cash App allows Square to generate revenue from merchant fees, expedited transfers to and from traditional bank accounts, and bitcoin exchange. I’m expecting it to be the company’s leading generator of gross profit by 2022.
Most folks know Buffett as one of the richest people on Earth, but they may not realize just how successful he’s been as an investor, and at making other people money. Since 1965, Berkshire Hathaway’s average annual return of 20.3% is more than double that of 10% total return of the S&P 500, inclusive of dividends paid. In aggregate, Buffett’s company has outperformed the benchmark S&P 500 by over 2,700,000% in those 55 years, creating more than $400 billion in value for the company’s shareholders.
Buying Berkshire Hathaway also aligns investors with the U.S. and global economy. The Oracle of Omaha is a big fan of buying into cyclical businesses — those that do well when the economy is running on all cylinders, but struggle a bit when recessions pop up. What you should know is that periods of expansion typically outpace the length of economic contractions by a significant margin. Buffett is simply playing the odds, and that’s worked well for his shareholders.
It’s also hard to argue against Berkshire Hathaway’s capital return program. Even though Warren Buffett’s company doesn’t pay a dividend, Buffett and his right-hand man Charlie Munger have not been shy about repurchasing their own stock over the past two years and lowering Berkshire’s outstanding share count. This can have a positive effect on earnings per share and make a company more fundamentally attractive to investors.
History says you should never bet against Buffett over the long term, and Robinhood investors appear to be heeding that advice.
Finally, thanks to fractional-share purchases being available on the Robinhood platform, investors have wisely been piling into shares of Amazon (NASDAQ:AMZN).
Most folks know Amazon for its superior seller marketplace. According to estimates from Bank of America/Merrill Lynch, Amazon controls 44% of all U.S. online sales, which is a great position to be in. After all, the U.S. is the largest economy in the world by gross domestic product (GDP), and consumption accounts for close to 70% of GDP.
Amazon also does a great job of keeping customers loyal to its platform by promoting its Prime membership. More than 150 million people worldwide have purchased a Prime membership, giving them access to exclusive content and Amazon’s superior logistics network. For Amazon, the fees collected from Prime help to further cement its comparative price advantage over brick-and-mortar retailers.
But it’s not retail that’s going to drive Amazon’s operating cash flow growth. Rather, that’s reserved for the company’s burgeoning infrastructure cloud-service segment, Amazon Web Services (AWS). We were already seeing businesses recognize the importance of having an online/cloud presence well before the pandemic struck. The coronavirus has simply accelerated an existing trend and pumped up business for AWS.
In the pandemic-impacted second quarter, Amazon delivered 29% growth for AWS from the prior-year period, with the segment now pacing more than $43 billion in annual extrapolated sales. What’s important to understand about AWS is that the margins associated with cloud services are many times larger than the razor-thin margins the company deals with in retail. As AWS grows into a larger percentage of total sales, Amazon’s cash flow is going to explode higher. Between 2019 and 2023, Amazon’s operating cash flow per share could triple, all thanks to AWS.