2 Growth Stocks to Buy Now With Less Than $500
Snowflake is well-positioned to benefit from companies investing in advanced data analytics capabilities using AI.
10 stocks we like better than Alphabet ›
Growth stocks can help you get ahead of your retirement goals. But you don't have to chase high-risk stocks to achieve this. There are plenty of industry-leading businesses that consistently report above-average growth that can outperform the S&P 500.
If you have around $500 or less to commit to a long-term investment strategy, here are two growth stocks benefiting from artificial intelligence (AI) and cloud computing that can deliver market-beating returns in the next five years.
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) continues to win on multiple fronts that is not reflected in the stock's modest price-to-earnings multiple. The company dominates search while its cloud computing business is outperforming the broader cloud market thanks to its AI investments.
Alphabet generates most of its revenue from advertising on search, YouTube, and other services. It continues to benefit from the growth of the $700 billion digital ad market. The company's first-quarter earnings report showed strong growth across the business. Total revenue grew 12% year over year to reach $90 billion, exceeding Wall Street's expectations. Earnings jumped 49% over the year-ago quarter.
Google's consumer services are the main revenue driver for Alphabet, but the company's hidden gem is its Gemini AI model, which powers the intelligent features across all the company's products, like AI Overviews and Google Lens. The first-quarter launch of Gemini 2.5 was widely recognized as the smartest model on the market, beating out OpenAI's ChatGPT and others.
Google's advances in AI continue to be undervalued by investors. Management credited its recent growth to its full-stack approach to AI, including data centers, chips, research (e.g. Google DeepMind), and consumer reach with more than 2 billion users.
AI is also driving strong demand and improving profitability in Google Cloud. Cloud revenue grew 28% year over year last quarter, outpacing the industry. The segment's operating income increased by 142%, now making up 7% of the company's total operating profit. Google recently announced the $32 billion acquisition of Wiz that will further strengthen Google Cloud's offering in cybersecurity.
Alphabet stock has a long history of beating the market, and its current momentum should keep the streak going. Analysts expect the company's earnings per share to grow 15% on an annualized basis over the next several years, yet investors can buy shares for just 18 times this year's earnings estimate. This valuation should allow shareholders to earn returns comparable to, if not better than, Alphabet's future earnings growth.
Companies are shifting their data systems over to platforms like Google Cloud to take advantage of AI services for data analytics and building AI applications. Snowflake (NYSE: SNOW) is a data cloud platform that helps companies simplify this process.
Snowflake's Data Cloud platform is offered on all the leading cloud services like Google, and it continues to grow strongly. Snowflake's product revenue grew 26% year over year in Q1, reaching $997 million. The company has consistently posted around 25% or better revenue growth since its initial public offering in 2020.
Snowflake brings in advanced AI models from all the leading vendors, including OpenAI and Anthropic, to give customers flexibility to use whatever they need. This makes its platform a one-stop shop for advanced analytics.
Snowflake rolled out more than 125 new product features last quarter, which management credited for driving demand. A key metric commonly used by software companies to gauge demand strength is the revenue retention rate. Anything more than 100% is generally considered good, but Snowflake reported a 124% retention rate last quarter, indicating healthy demand from existing customers for services on its platform.
It might be viewed as a weakness that Snowflake doesn't offer its own proprietary AI models for customers. However, by integrating third-party models, Snowflake can offer companies more flexibility in choice while saving money on AI research, which it can invest in more capabilities for its data cloud platform. This allows the company to report balanced top- and bottom-line growth. Over the last year, Snowflake generated $735 million in free cash flow on $3.8 billion of revenue.
Wall Street analysts expect Snowflake's earnings to grow more than 35% on an annualized basis. The stock trades at a high multiple of sales and earnings, but assuming Snowflake delivers on robust earnings growth, the stock could outperform the S&P 500 over the next five years.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Snowflake. The Motley Fool has a disclosure policy.
2 Growth Stocks to Buy Now With Less Than $500 was originally published by The Motley Fool
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