The Nasdaq-100 is a market-cap-weighted index that includes 100 of the largest non-financial companies listed on the Nasdaq Stock Market.
Chock-full of growth stocks and industry-leading businesses, the Nasdaq-100 has produced roughly double the total return of the S&P 500 over the last decade thanks to big tech's contribution to broader marker gains.
Here's why top Nasdaq-100 stocks Apple(NASDAQ: AAPL), Adobe (NASDAQ: ADBE), and PepsiCo(NASDAQ: PEP) are worth buying in May.
Image source: Getty Images.
Apple's underlying growth is improving
Lee Samaha(Apple): Warren Buffett-led Berkshire Hathaway's largest holding continues to deliver for investors. With Apple's recent fiscal second-quarter earnings, the company allayed fears its core iPhone revenue was in decline and demonstrate ongoing growth in services that continue to transform its profit margin profile.
It's no surprise Buffett loves Apple stock. After all, its market position in smartphones and, to a lesser extent, laptops, tablets, and wearable devices, enables it to grow its high-margin services over the long term. Of course, that argument doesn't apply so strongly if its core iPhone sales are in decline -- which is what the market was worried about going into the earnings.
However, according to management, iPhone sales rose in the second quarter if you exclude the one-time boost to last year's iPhone revenue as the company caught up with pent-up demand caused by pandemic-related supply chain issues. That's a relatively good result in a weak environment for global consumer spending.
Moreover, if interest rates are lower next year, then discretionary consumer spending is likely to receive some support, and artificial intelligence (AI)-related iPhones can boost growth in the future.
Meanwhile, the double-digit growth in services revenue (which generates double the gross profit margin of its product revenue) means Apple's profit margin and cash generation profile are likely to improve over time. This makes the stock a buy for Buffett and retail investors.
Adobe is an AI stock that you don't have to break the bank to buy
Scott Levine (Adobe): There are the well-known artificial intelligence stocks -- I'm looking at you Nvidia -- and then there are the less-repeated names like Adobe. For most people, Adobe, a leading software-as-a-service (SaaS) stock, is recognizable as the creator of popular products like Photoshop, Acrobat, and Illustrator. Representing another option for AI-focused investors, the company is also strongly committed to incorporating AI solutions into its suite of products, however. With Adobe stock, AI investors don't have to worry about the rich valuations that its AI peers have now reached, making it an even more compelling option for those seeking AI exposure.
Whether it's in your professional life or personal life, it's almost a guarantee that you're working with Adobe's PDFs. Now, users can bring the power of AI to those PDFs with Adobe's AI Assistant, enabling users to ask questions and interact with documents in other ways. The company is also leveraging the power of generative AI with Firefly, a generative AI tool available with several Adobe programs. Already Firefly has taken flight with users. On its first-quarter 2024 conference call, Adobe revealed that users have used Firefly to create more than 6.5 billion assets since the product was launched last year. The market opportunity for Adobe in generative AI alone is tremendous. Bloomberg estimates that the generative AI market has the potential to rise at a 42% compound annual growth rate from $40 billion in 2022 to $1.3 trillion in 2032.
Unlike other AI stocks whose valuations have skyrocketed recently, Adobe shares are more modestly valued. Changing hands at 31.9 times operating cash flow, a discount to its five-year average valuation of 33, Adobe stock is attractively priced. While it might not be a screaming buy at this point, investors can think of it more as a raised voice buy.
So much more than just soda
Daniel Foelber (PepsiCo): When you think of the Nasdaq, growth stocks probably come to mind. But Pepsi happens to trade on the Nasdaq exchange. And like Costco Wholesale, it's one of the largest components of the Nasdaq-100 -- clocking in as the 13th largest holding and making up 1.8% of the index.
Pepsi is known for its flagship soft drink. But the company is actually far more diversified than you may realize. Pepsi is much different than its peer Coca-Cola(NYSE: KO) because Pepsi is big in the food industry, whereas Coke focuses almost entirely on beverages.
The crown jewel of Pepsi isn't even its beverages business -- it's Frito-Lay. Frito-Lay North America made up a whopping 31% of Pepsi's sales from the second quarter of 2023 to Q1 2024 and 57% of its operating income. Pepsi also owns Quaker Foods and generates around a third of its sales from outside North America.
Pepsi has done a masterful job growing sales while maintaining an operating margin of around 13% to 16%.
PEP Operating Margin (TTM) data by YCharts
Pepsi is a more complicated business than Coke and features significantly more brands. In the past, Pepsi was arguably too inefficient, which is why the stock often played second fiddle to Coke. But Pepsi has outperformed Coke over the last three-year, five-year, and 10-year time frames, including more than doubling over the last decade compared to a 52% gain for Coke.
What's more, Pepsi has a 3.1.% dividend yield , which is coincidentally the exact same as Coca-Cola. I'd still say that overall, Pepsi is a bit riskier than Coke given how spread out the business is. But Pepsi's execution is hard to ignore.
Pepsi is a no-brainer buy for investors looking for a sizable amount of passive income and a blue chip company they can count on long term.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Apple, Berkshire Hathaway, Costco Wholesale, and Nvidia. The Motley Fool has a disclosure policy.
