3 no-brainer stocks you’ll regret not buying after your profits

While the performance of a company’s stock at the time of its quarterly results is eye-catching – and usually grabs the headlines – the company’s underlying fundamentals should be far more critical for investors.

With that in mind, three Motley Fool contributors will examine Amazon (AMZN -1.24%), Braunschweig (BC 0.43%)and Airbnb (ABNB -1.77%) after their earnings, explaining why each is worth investing in, despite recent rises.

Amazon’s earnings are a glimpse of the future

Bradley Guichard (Amazon): Judging by Amazon’s stock gain of 14% since announcing its second-quarter results, you might think it’s had a stellar quarter.

But that’s not exactly what happened. Growth of Amazon Web Services (AWS) has slowed; total sales increased 7%, but net product sales fell year-over-year; Amazon’s already thin operating margin contracted.

So what gives? Two things:

  1. The 7% growth was not the worst quarter that many feared.
  2. The company’s prospects are dazzling.

Amazon was a pioneer in online retail, and many people still associate the company with selling products; however, the future of Amazon is selling services. Retail sales will likely always be part of the business, but cloud services and ad sales are the future.

As mentioned, product net sales were down 2.5% year over year, but service net sales were up 17%. This is great news for investors, as Amazon’s service margins are far higher than product sales margins. Amazon Web Services has an operating margin of 32% so far in 2022. On the product side, discount retail just isn’t a high-margin business. You just have to ask walmart, which recently lowered its operating margin forecast to less than 4%. Amazon’s focus on services should massively increase future profitability.

AWS’ year-over-year growth slowed from 37% in the first quarter to 33% in the second quarter, but remains extremely robust. AWS will generate over $82 billion in sales in 2022 and over $26 billion in operating revenue if current trends continue.

Ad sales generated $12.7 billion in 2019 and have skyrocketed ever since. In 2022, ad sales are expected to generate more than $37 billion, nearly tripling in just three years. In fact, ad sales will soon generate more revenue than Prime subscriptions if the current pace continues.

Valuing just these two revenue streams at 10x expected 2022 sales, similar to cloud services competitor valuation Microsoft, would get a market capitalization close to $1.2 trillion. The company looks deeply undervalued, with Amazon’s current total market capitalization of just $1.4 trillion. If management also brings the retail segments back to profitability, the stock should outperform the market and generate substantial profits for investors.

A stock to keep your wallet above water

Jeff Santoro (Brunswick): When it comes to investment ideas, boating might not be the first thing that comes to mind. However, looking at recent results from Brunswick, savvy investors will see that boating can be a profitable business. Selling everything marine-related, Brunswick has beaten the market by more than 20% over the past three years.

For the second quarter of 2022, Brunswick posted revenue growth of 18%, good for a record $1.8 billion. Additionally, operating profit rose 12% and earnings per share rose 14% to $2.61, also a quarterly record. These results were driven by strong sales growth in all three of Brunswick’s segments.

Segment

Q2 2021

Q2 2022

To change

Propulsion

$650 million

$734 million

13%

Parts and Accessories

$549 million

$652 million

19%

Boats

$449 million

$568 million

27%

Data source: Brunswick.

Of particular interest is the growth of the recreational boating segment. In its presentation of second quarter results at the end of July, management said that since the start of the pandemic, boat inventories were at historically low levels. The fact that Brunswick was able to sell 27% more boats shows how demand outstrips supply. If boat production capacity improves, Brunswick may see even higher sales.

The Freedom Boat Club (FBC) of Brunswick is also part of the boat segment. It offers its members a fleet of boats to use at their local club, as well as benefits at other FBC locations around the world. FBC currently represents a small portion of revenue, but it is growing. In the second quarter, FBC accounted for 6% of overall boat segment revenue, compared to 3% in the second quarter of 2021.

FBC has many advantages for the whole company. In addition to the revenue it generates, the company strives to increase the percentage of the FBC fleet that is made up of Brunswick boats. This in turn presents opportunities for the propulsion and parts and accessories segments. Finally, the opportunity to try boating through FBC could end up converting some members into future boat owners.

Brunswick is profitable and has positive free cash flow. Recently, the company used its excess capital to reward shareholders. In the second quarter, it repurchased $140 million of its own shares and, combined with its dividend, Brunswick expects to return more than $500 million to shareholders in 2022.

Given its growth and shareholder-friendly capital allocation, Brunswick is an obvious buy, and recent earnings have only confirmed the strength of the company.

A dynamic duo: Strong sales growth and strong free cash flow

Josh Kohn-Lindquist (Airbnb): Driven by its mission to “create a world where everyone can belong anywhere”, Airbnb’s operations align beautifully with many ideologies important to millennials and Gen Z. the company fully embraces the growing work-from-anywhere lifestyle for its customers and enables its guests to realize the new profit potential of selling extra bedrooms in their homes or empty vacation homes.

Ranking 19th and 35th respectively among Millennials and Gen Z, Airbnb is the 78th strongest brand in the world, according to Comparably. Thanks to this widespread recognition, Airbnb now has more than 4 million hosts who have served more than a billion travelers since its inception.

As each new host and guest comes on board, the company’s vast network grows exponentially stronger as its market becomes increasingly efficient. Highlighting these efficiencies, Airbnb’s sales grew 58% year-over-year for the second quarter of 2022 and its free cash flow margin was 38%, which which helped justify the recent rise in the share price.

Even after that stock price jump — and removing stock-based compensation from its free cash flow — Airbnb still trades at an intriguing price to free cash flow (P/FCF) ratio of 36.

ABNB Market Cap Data by YCharts

Plus, that $73 billion market cap includes the company’s $10 billion cash balance, which makes this valuation even more attractive. Whenever a company’s revenue growth rate is higher than its P/FCF ratio, investors should take note as it potentially highlights growth at a reasonable valuation.

Recently introduced split stays add even more fuel to Airbnb’s growth prospects – which do exactly as the name suggests, allowing guests to stay in different places during the same trip. This simple idea could help increase market efficiency between hosts and their guests, giving guests greater flexibility when dealing with specific dates they need to use.

With analysts predicting 37% sales growth for 2022 as the travel industry continues to rebound, Airbnb’s cheap valuation and steadily improving free cash flow margins make it a great stock to watch. buy, even after its recent price increase.

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