Mega-cap stocks continue to be the talk of the market right now. And that’s for good reason. Most major indices continue to have their performance dominated by a handful of stocks on a given day, unlike previous markets with more breadth. This can be a good and a bad thing. But for now, it’s mainly a positive given how most portfolios are currently constructed.
The thing is, we may start to see some divergence build among certain mega-cap growth stocks in the market. I think some companies are starting to look overvalued, with others seeming to represent reasonable value. The three companies I’m going to discuss below each fall in the latter category.
Meta Platforms (META)
Seeing a 6.8% of stock increase in the past month, Meta Platforms’ (NASDAQ:META) stock price has seemingly headed only higher. In recent years, Meta has continued to heavily invest in its Reality Labs division, focusing on metaverse initiatives. Alongside these investments, the company has provided more capital to its virtual reality and generative AI segments, launching Llama 3 language model and an AI image generator via WhatsApp.
The company also shows an impressive ROE that surpassed the 7.4% industry average. This has supported 11% of the company’s income since 2019. Moreover, it has outperformed the 6% growth rate of the industry. Meta retains a high percentage of its profits with a low three-year median payout ratio of 2.8%, indicating a focus on reinvesting in business growth.
To add, the company has over 3.2 billion in user base to support its projects, including enhancing user experience. Advertising revenues are also noteworthy, growing 27% in Q1. So long as this cash cow continues pumping out growing cash flows, its valuation looks far from inflated right now.
Amazon (AMZN)
Another mega cap stock to own is e-Commerce giant Amazon (NASDAQ:AMZN). In Q1 2024, the company saw a 200% increase due to its strong cloud computing segment. Amazon boosted AI sales by 17% and operating income surged 84%. AWS now contributes 60% of Amazon’s operating income, with potential to unlock $600 billion in software revenue by 2028, suggesting a 17% upside in stock value.
Amazon is reportedly developing a new chatbot called “Metis,” utilizing an advanced AI model named Olympus instead of its older Titan model. The approach, known as retrieval-augmented generation (RAG), allows the chatbot to retrieve information from trusted sources, enhancing control over text output.
RAG enables systems to access up-to-date data from sources like APIs and documents without retraining models, enhancing accuracy. Amazon CEO Andy Jassy and AGI team’s head scientist Rohit Prasad are leading Metis’s development, with a team including veteran Alexa AI workers. Metis, potentially launching in September, might face stiff competition from established players like ChatGPT and Google’s Bard.
In other AMZN news, Amazon’s Prime Day 2024 will be held on July 16 and 17 in various countries including the U.S., UK, and Germany. Despite spanning two days, it’s still called “Prime Day.” India will have a separate Prime Day later in the summer. The event will feature hundreds of deals in millions of products, accessible for Amazon Prime subscribers on July 16.
Berkshire Hathaway (BRK-B)
Nothing beats the Oracle of Ohama when it comes to investment schemes, and his very own Berkshire Hathaway (NYSE:BRK-B) remains a solid investment choice for investors seeking stability. Recently, the company sold shares in BYD (OTCMKTS:BYDDF), according to its HK stock exchange filing. Disclosures are required in Hong Kong when stakes fall below whole percentages.
There’s a reason why Berkshire is rated a strong buy by most market analysts. The consensus is that this stock continues to have 15% upside from here, even after its incredible run. Over the past five years, Berkshire shareholders have doubled their money in this name. That’s reflective of the sort of slow-and-steady approach most of the company’s holdings provide investors. In a market of potential uncertainty, this company’s diversified holdings and substantial cash reserves are likely to be valued much more dearly by the market.
Given its size, there are doubts about its continued success. However, its strategy of acquiring excellent businesses at fair prices distinguishes it. The company’s portfolio is resilient to economic downturns, combining stable businesses with high-growth tech stocks, ideal for long-term investment. Investors may want to consider buying this stock during market downturns.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
