Some investors may be averse to buying stocks that are already above a trillion-dollar valuation, but this is a mistake. While the law of large numbers dictates that growth will be harder the larger you get, nearly all trillion-dollar companies have taken exception to that rule due to their dominance.
Investors should look to invest in the most dominant companies in the world, as these are the ones that will drive long-term returns. Two trillion-dollar stocks that I think are fantastic investments right now are Amazon (AMZN -1.55%) and Alphabet (GOOG -0.78%) (GOOGL -0.81%). Both companies are dominant in their respective niches yet still have more room for improvement, which means higher return potential.
Amazon
Amazon has been one of the most innovative companies in the world over the past two decades. The way it has transformed how people shop is nothing short of incredible. If you surveyed the average person about services they couldn't live without, Amazon Prime and its fast shipping would likely be atop that list.
But Amazon isn't just about commerce. It's also been an innovator in the cloud computing space. Amazon Web Services (AWS) is the largest cloud computing provider by market share and is fundamental to modern computing. Even in the age of the artificial intelligence (AI) arms race, AWS is still highly relevant, as anyone looking to create an AI model needs serious computing power, which is conveniently available for rent from AWS.
From a financial perspective, Amazon is reaching unexplored levels. While Amazon continues to post solid growth (revenue rose 13% year over year in the first quarter), its margins have the most room for improvement. Thanks to CEO Andy Jassy's renewed focus on efficiency, Amazon's operating margins in all segments have improved dramatically in just one year.
| Segment | Q1 FY 2023 Operating Margin | Q1 FY 2024 Operating Margin |
|---|---|---|
| North America | 1.2% | 5.8% |
| International | (4.3%) | 2.8% |
| AWS | 24% | 37.7% |
Data source: Amazon.
That improvement has helped the company's profitability, although, according to Jassy, there is still room for improvement.
The stock market is also pricing in this improvement, as the stock trades at a pricey 41 times forward earnings.
AMZN PE Ratio (Forward) data by YCharts
As Amazon grows and its margins improve, this premium will continue to decrease. There's too much good going on with the company to ignore it, so investors should scoop up shares when they can.
Alphabet
With its Google search engine and YouTube platform, Alphabet is highly exposed to advertising. In Q1, 77% of revenue came from advertising, so ensuring its platform is the best in the business is critical.
Alphabet has long been a leader in this field, and its latest rollout of AI tools powered by its generative AI model, Gemini, has only solidified that. When you search on Google, an AI-created summary appears at the top of the search results, which is useful in many instances. Alphabet also empowers advertisers by giving them tools to create a successful ad campaign easily.
Similar to Amazon, Google Cloud's division competes in the same market but has a particular focus on AI tools. That's why 60% of funded generative AI start-ups and 90% of generative AI unicorns (private companies worth more than $1 billion) have chosen Google Cloud.
While Alphabet's financials are rock solid, its stock is much cheaper than many of its trillion-dollar peers' from a forward price-to-earnings (P/E) standpoint.
MSFT PE Ratio (Forward) data by YCharts
At 23.4 times forward earnings, Alphabet barely holds a premium to the broader market, as the S&P 500 trades at 22.1 times forward earnings. Considering how important Alphabet is to many industries, it seems criminal that the stock trades that close to the S&P 500.
However, you have to take what the market gives you, and right now, it's a smoking hot deal on Alphabet stock. Investors shouldn't expect this deal to hang around for much longer, so take advantage of it while you can.
