“We have to focus on the forest of spend, not the trees of trade and then we can make the big money.”
That’s what CNBC personality and hedge fund manager Jim Cramer recently said after noting that the U.S. economy isn’t one powered by manufacturing and industry. Rather, the U.S. economy is powered by consumer spending. Thus, Cramer’s point is that focusing on President Trump’s trade crusade misses the big picture. Instead, investors should look at how strong the economy is. To do that, investors should look at how strong the consumer is.
Cramer is right. Consumer spending accounts for about 70% of America’s total GDP. So, as goes the consumer, so goes the U.S. economy — and the stock market.
More than that, consumer spending on goods is only 20% of GDP. Consumer spending on services accounts for a whopping 50% of GDP. That’s right. Half of the U.S. economy is driven by the consumption of services.
Thus, I’d like to extend Cramer’s thinking out a bit further. Following consumer spending is smart. But, following consumer spending on services is even smarter. If you want to pick real winners in this stock market, go look at some services stocks.
With that in mind, here are 15 services stocks which you should consider adding to your portfolio as the economy heats up.
Services Stocks to Buy: Amazon (AMZN)
When it comes to services stocks, one of the bigger, stronger names with a ton of firepower is Amazon (NASDAQ:AMZN).
Amazon is traditionally thought of as an e-commerce giant, but it is so much more than that. Amazon is an omnipotent services company extending its fingertips into every services sector possible, including cloud, logistics, healthcare, pharmaceuticals, streaming entertainment, digital advertising and so on and so forth. Because of this wide reach, it really isn’t that hard to imagine a future in five to ten years where Amazon has a business in every sub-segment of the services economy.
Bears continue to knock the valuation on AMZN stock. But, so long as this company keeps disrupting, Amazon will continue to dramatically expand its addressable market, and AMZN stock will head higher. In a nutshell, this is a long-term winner.
Services Stocks to Buy: Apple (AAPL)
The biggest service stock of them all is Apple (NASDAQ:AAPL).
America’s first trillion dollar company got to a trillion dollar valuation by selling must-have consumer technology products like the iPhone, iPad and Mac. But that hardware business is starting to dry up. The next leg of growth at Apple will be powered by the company’s rapidly growing Services business, which is essentially a collection of subscription services that Apple offers to its ecosystem of users.
Growth here has been red-hot (30%-plus), and it is high-quality growth (gross margins are sky high and stable). Meanwhile, AAPL stock trades at just 18x forward earnings. That’s an exceptionally reasonable multiple for a high-growth services stock. Consequently, AAPL stock has nice upside from here with mitigated downside risk.
Services Stocks to Buy: Square (SQ)
One of the fastest growing services stocks in the market is Square (NASDAQ:SQ).
Square is a pure play on the cashless revolution. The company provides payment processing solutions which enable digital and card payments across multiple different sales points. Because the whole world is going cashless, demand for Square’s suite of services has skyrocketed over the past several quarters, and revenue growth has accelerated from 40% a year ago to 60% last quarter. This accelerating revenue growth has powered SQ stock 200% higher over the past year.
Valuation is a slight concern for SQ stock at these levels. As such, I’d wait for a pullback to enter. But, long-term, the growth narrative surrounding SQ stock supports materially higher share prices several years down the road as cash becomes a relic of the past.
Services Stocks to Buy: Facebook (FB)
The best thing about Facebook (NASDAQ:FB) is that it provides arguably one of the world’s best services at no financial cost to its users.
Between Facebook, Instagram, WhatsApp and Messenger, the Facebook ecosystem has 6 billion monthly active users. None of them pay a dime to use any of those platform’s core services. Meanwhile, because of its massive reach, Facebook’s ecosystem continues to attract a ton of ad dollars, which are flowing en masse from traditional channels to digital channels. As this shift continues to play out over the next several years, Facebook will be a big winner because nobody else, outside of Google, has comparable global reach.
Bears are concerned about falling engagement on the core Facebook platform. But where is that engagement going? Instagram and WhatsApp, both of which are owned by Facebook. Thus, at less than 25x forward earnings, FB looks like one of the best services stocks to own here and now.
Services Stocks to Buy: Adobe (ADBE)
Lesser known but arguably just as powerful as other names on this list, Adobe (NASDAQ:ADBE) is an attractive service stock because the company is a dominant force in its industry.
Adobe provides a suite of services for creative professionals and enterprises. Those services range from photo editing to document digitizing to analytics driven design, branding, and marketing. Across all those solutions, Adobe’s competitors are largely nameless, and Adobe dominates the market. That is why this company’s financials have been characterized by robust revenue, margin, and profit growth over the past several years.
This trend will persist as Adobe expands into new markets and dominates those markets, too. Meanwhile, ADBE stock isn’t all that expensive at 40x forward earnings, considering its massive growth potential. Overall, this is a big-moat, big-growth stock with a reasonable valuation, and that makes it a solid long-term holding.
Services Stocks to Buy: AMC (AMC)
In case you haven’t heard, movie theaters are back.
Box office attendance has bounced back in stunning fashion in 2018, and one of the biggest beneficiaries of this bounce-back is AMC (NYSE:AMC), America’s largest movie theater operator. Growth going forward looks promising because this whole industry is going towards a subscription model. MoviePass tried it out, but didn’t have the assets or pricing power to pull it off. Now, AMC is adopting the subscription model, and that should provide a material lift to movie theater attendance over the next several years.
Meanwhile, AMC stock is still well off its multi-year highs. I think movie theater attendance is about to enter a golden era thanks to sustainable movie subscription services, and as a result, I think AMC stock will test its all time highs over the next several years.
Services Stocks to Buy: AT&T (T)
Cord cutting has plagued telecom giant AT&T (NYSE:T) over the past several years. But, that could all change relatively soon.
Of all the telecom giants, AT&T is perhaps the best positioned to do well as cord-cutting persists. That is because AT&T has DirecTV Now, which is one of the largest OTT subscription services in the U.S. As cord-cutting accelerates over the next several years, DirecTV Now’s user base should grow tremendously. That will help AT&T offset cord-cutting pain, while the rest of the business benefits from a massive 5G boom in 2019.
From a valuation perspective, AT&T stock looks safe here. The dividend yield is right around five year highs of 6%. It is hard to imagine that yield going much higher. Thus, over the next several years, I think AT&T sock could win thanks to a depressed valuation converging on improved operational results.
Services Stocks to Buy: Netflix (NFLX)
If AT&T wants to point a finger at anyone for their recent struggles, that finger should be pointed at Netflix (NASDAQ:NFLX).
The streaming giant has pioneered a new way to consume media through the internet. Everyone hopped on board because it was reasonably priced, was way more convenient than cable, and has recently been injected with a treasure chest of really good original content. All signs point to Netflix’s OTT streaming service only growing by a ton more over the next several years as this internet entertainment trend goes global.
Having said that, NFLX stock is very richly valued, and there are competitive risks starting to materialize on the horizon. Thus, I caution buyers at these levels that the risk-reward profile isn’t all the great, and that waiting for a big dip might be the better option.
Services Stocks to Buy: Weight Watchers (WTW)
Healthy eating trends and celebrity endorsement have driven Weight Watchers (NYSE:WTW) stock more than 1,000% higher over the past three years.
As it turns out, a lot of people want to lose weight and look good in this visual-oriented world defined by Instagram, Snapchat and other photo-sharing apps. As the healthy eating and working out culture has grown over the past several years, adoption of the Weight Watchers program has grown, too. Weight Watchers has also received a nice lift from celebrities like Oprah and hip-hop artist DJ Khaled buying into the weight loss program.
Recently, WTW stock has been stung by slower growth concerns. But, subscriber growth is still nearly 30% and revenue growth is right around 20%. Thus, WTW remains a big-growth story. So long as those growth numbers remain healthy, WTW stock should perform well.
Services Stocks to Buy: Axon (AAXN)
Not all services are directed at the consumer. For services directed towards law enforcement agencies, there is Axon (NASDAQ:AAXN).
The company used to make a living sell smart weapons and body cameras to law enforcement agencies everywhere. Over the past several quarters, Axon has expanded their business model to sell smart weapons, body cameras, and a suite of cloud-hosted services to law enforcement agencies to help them modernize and optimize their operations. Appetite for these new solutions has been robust, and huge revenue and profit growth at Axon have powered AAXN stock to huge gains this year (+140%).
The valuation on AAXN stock is rich, yes, but the addressable market is huge and Axon’s penetration rate is low. Thus, the growth runway is big enough and long enough to support AAXN’s presently big valuation.
Services Stocks to Buy: Google (GOOGL,GOOG)
Google search processes billions of search queries a day from presumably billions of users worldwide. Because of its unparalleled global reach, Google’s advertising business is massive, and promises to only get bigger as more and more ad dollars come online. Plus, Google is taking its huge search database, and developing next-gen services with it. Those services include Waymo (self-driving), Google Home (smart home), and Google Cloud (cloud services).
GOOG stock is reasonably valued considering its broad exposure to multiple secular growth markets like AI, cloud and digital advertising. At just 25x forward earnings, there is a reasonable argument for GOOG stock to run higher over the next several years due to both earnings growth and multiple expansion.
Services Stocks to Buy: The Trade Desk (TTD)
When it comes to big growth services stocks, the cream of the crop is The Trade Desk (NASDAQ:TTD).
The company, which provides programmatic advertising solutions for advertisers of all shapes and sizes, has found itself at the center of multiple tailwinds recently. Namely, programmatic advertising is the future, and as advertisers pour massive amounts of money into multiple different advertising channels, they are increasingly using data and algorithms to optimize spend.
That is why TTD stock has been on fire this year. Revenue growth has consistently run in the 50%-plus range, and TTD stock has risen 200% in 2018 alone. A 200% gain in eight months is tough to replicate, but Trade Desk is attacking a huge market, of which it controls only a tiny piece. As such, TTD stock should continue to head higher in the long run.
Services Stocks to Buy: Shopify (SHOP)
In the e-commerce world, a service stock that all investors should know about for the next several years is Shopify (NYSE:SHOP).
Shopify provides cloud-hosted services which enable retailers of all shapes and sizes to operate an e-commerce business. Considering the whole world is moving towards digital shopping, these services are of increasing importance. Moreover, considering the economy is becoming more and more entrepreneurial everyday, Shopify is enabling an entire new class of independent retailers that didn’t exist before.
From this perspective, Shopify is tapping into a potentially massive market of retailers ranging from multi-million dollar enterprises to start-up operations selling shirts out of a garage. Shopify is presently gabbing only a small portion of that massive market, and as such, this company’s long-term narrative supports big growth for the next several years.
Services Stocks to Buy: Palo Alto Networks (PANW)
Cybersecurity giant Palo Alto Networks (NYSE:PANW) provides what will arguably turn into the most valuable service in the world over the next five to ten years.
That service is protecting the immense amount of valuable data that is moving online. As all that data migrates to the digital channel, it becomes susceptible to hacks. As such, cybersecurity solutions to prevent such hacks will become increasingly important as more and more data goes online. Considering the amount of data in the world is expected to grow by ten-fold by 2025, cybersecurity solutions will naturally become very important over the next decade.
Palo Alto Networks is the king of the cybersecurity space. They are a huge cybersecurity player that continues to grow at a robust rate, a testament to just how much better PANW is than its peers. With respect to the stock, PANW stock is pricey at 44X forward earnings. But, the long-term growth narrative surrounding the ever increasing importance of cybersecurity solutions is robust enough to support the valuation.
Services Stocks to Buy: Disney (DIS)
There are signs that the Disney (NYSE:DIS) turnaround is here, and my bet is that this turnaround only gains momentum over the next several quarters.
Disney stock has been weighed down by cord-cutting concerns recently. But, the company is prepping a DTC streaming service to offset those headwinds. Thus, Disney is turning into Netflix, and in so doing, could become one of the most valuable services stocks in the world.
After all, when it comes streaming services, it’s all about content. Disney has all the best content. Marvel to LucasArts to Pixar to Disney themselves, the company has the world’s biggest treasure chest of blockbuster hits. Disney will take all that great content, throw it on one streaming service, and consumer demand will subsequently be huge. Thus, when Disney’s streaming service launches in 2019, DIS stock could get a huge boost.
As of this writing, Luke Lango was long AMZN, AAPL, FB, ABDE, AMC, T, WTW, AAXN, GOOG, TTD, SHOP, PANW, and DIS.