2025 is getting closer, and investors need to start thinking about how they want their portfolios positioned headed into the new year. Fund managers often make big changes before the new year, which can ignite a “Santa Claus rally.” This effect pushes stock prices up in December, so individual investors must start considering their moves now.
Two stocks that I will likely increase my position in before the new year are Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) and PayPal (NASDAQ: PYPL). Both of these stocks could see some interest before the new year, as they are relatively cheap compared to many stocks in the market.
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Alphabet is Google’s parent company and has a dominant grip on the search engine market. While there were some worries earlier this year that Alphabet’s grip on this function could be in danger, it’s clear that those fears were overblown. Alphabet has proven itself nimble enough to implement changes (like the generative AI-powered search summary) and will likely be able to copy successful features from rival search products before it sees too many defectors.
Additionally, Alphabet is seeing huge demand in its Google Cloud division. That division, which is thriving as its clients increase their computing power to develop AI models, has many unique tools available. Google Cloud’s popularity and usage have soared, leading to revenue rising 35% year over year to $11.4 billion.
Overall, Alphabet’s third-quarter revenue increased 15% year over year to $88.3 billion, which is not bad for the fourth-biggest company in the world. Still, it’s valued at an incredibly low price, with Alphabet’s stock trading for just about 22 times forward earnings. Considering the S&P 500 (SNPINDEX: ^GSPC) trades at 24.6 times forward earnings, Alphabet could see a rally next year as investors look to find some cheaper stocks with strong growth potential in the market.
For about three years, PayPal hasn’t received much love from the market. Its stock price peaked at more than $300 per share in mid-2021 and pretty much declined until mid-2024. It has seen some interest recently, with the stock rising 50% since the beginning of July, but there’s still plenty of room to go.
PayPal’s CEO, Alex Chriss, joined the company in September 2023 and is leading a transformation. He laid out his vision to make the company more efficient and focus on what PayPal does best, rather than becoming an app that is used to do everything. This has worked out well in recent quarters, as PayPal’s business is showing signs of life.
PayPal’s active accounts increased slightly in Q3, marking the first growth since first-quarter 2023. Transaction margin also ticked up — something it hasn’t done in a couple of years. These slight improvements helped PayPal’s revenue rise 6% year over year, which isn’t all that impressive. However, investors need to focus on profits with PayPal, as it isn’t a growth story anymore. Operating income was up 19% to $1.4 billion, which is outstanding.
With its cash flows, PayPal is repurchasing a ton of stock and retired 28 million shares in Q3 alone. With about 1 billion shares outstanding, that means PayPal retired nearly 3% of its shares in one quarter. Most companies would be happy if they could do that in a year, yet PayPal is doing it much faster. This is occurring for two reasons.
First, PayPal’s management devotes all of its cash flows to repurchasing shares. It can afford to do this because its balance sheet is in a healthy spot. Second, it’s a good idea because the stock is cheap. At the start of Q3, PayPal’s stock traded for around 12 times forward earnings and 14 times trailing earnings.
PayPal’s stock is no longer as cheap after the rally, so the repurchases will be less effective, but it still has plenty of room to run, considering that it’s still well below the S&P 500’s price tag.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and PayPal. The Motley Fool has positions in and recommends Alphabet and PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
