If you want to find the best growth stocks, the list of companies that make up the Nasdaq-100 index is a great place to start. This index more than doubled the return of the Dow Jones Industrial Average over the last 10 years, and it’s holding its lead in 2023. Year to date, the Nasdaq-100 has rebounded 38%, compared to just 4.6% for the Dow.
Amazon (AMZN 0.12%) and Charter Communications (CHTR -2.57%) are two Nasdaq-100 stocks with long histories of beating the market that could be undervalued right now.
Amazon stock has rebounded this year, but is still trading 29% off its previous peak. While Amazon may never grow revenue at 38% again like it did in 2020, the market is underestimating the company’s improving profitability in the retail business.
Online stores reported a revenue increase of just 4% in the second quarter, but the trend over the last year shows accelerating growth as inflation cools. However, Amazon’s retail business could become more profitable than analysts previously thought possible. The company is streamlining its fulfillment network to reduce costs and speed up delivery times. This is already having a major impact on the bottom line, as Amazon reported a $6.7 billion profit last quarter, reversing the year-ago quarter’s loss of $2 billion.
Meanwhile, Amazon’s most lucrative revenue, which comes from cloud services (Amazon Web Services), advertising, third-party fulfillment fees, and subscriptions, is still growing at double-digit rates. Advertising revenue has been growing consistently above 20% each quarter, while AWS could see accelerating growth over the next year as organizations scramble to invest in generative artificial intelligence solutions.
One number that indicates an undervalued stock is Amazon’s cash from operations (CFO) per share. This metric peaked at $6.56 a few years ago before falling below $4 in 2022. It is almost back to the previous peak, but the stock isn’t keeping up. On a price-to-CFO basis, Amazon stock trades at a decade-low multiple of 22.
This is a once-in-a-decade buying opportunity. Management is still in the process of reducing the cost to serve customers in the online retail business. Amazon’s growing profits will remain a key catalyst for the stock in the near term, while more growth from AWS should keep the stock climbing for years to come.
2. Charter Communications
Charter is one of the leading internet and wireless providers in the U.S. The high barriers to entry in building the infrastructure to deliver broadband internet to millions across the country leads to consistent revenue performance, growing cash flows, and great returns to shareholders.
For most of the last decade, Charter crushed the market’s return, but Wall Street’s concerns over weakness in the economy, increasing competition from wireless providers, and Charter’s aggressive low pricing to win over new customers have weighed on the stock.
Shares are currently down about 50% from the previous peak, which offers another once-in-a-decade bargain for investors.
One competitor Wall Street is worried about is T-Mobile, which has been posting impressive growth with its wireless service. Through the first half of the year, T-Mobile reported more than 500,000 customer additions to its high speed internet service, beating Charter, Verizon, AT&T, and Comcast.
However, Charter is still reporting steady growth, adding 77,000 internet customers in the second quarter. It reported a solid 648,000 new mobile customers.
Wall Street is starting to realize the competitive concerns with T-Mobile and other wireless providers are overblown. Charter stock has climbed 30% year to date, and could have room to run. The shares trade at an enterprise value-to-EBITDA ratio of just 7.3 based on this year’s estimate. That is a steep discount from the average 13.6 multiple of the entire tech and telecom sector, and lower than Charter’s previous 10-year average EV/EBITDA valuation of 11.9.
Charter is currently investing to build a rural network to significantly expand the customer base over the next decade. Wireless technology will remain a threat, but leading broadband services are still in a good position since households with multiple devices that stream entertainment will still find Charter the best option. The company claims to offer the fastest internet at the lowest price, which is working to its advantage.
With the stock rebounding off multiyear lows on top of steady gains in customers, now’s the time to buy. Investors can look forward to great returns from these discounted share prices.
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 and Charter Communications. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool recommends Comcast, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.