It can be scary to buy a stock once it has gone up. It can give you the feeling that you may show up late for a party when they are about to turn off the lights. In my experience, these lights can stay on for a while, and this fear of being late costs me some potentially large returns. (Looking at you, Netflix.)
Big companies build competitive advantages and often continue to produce market returns if you give them time to grow … and grow … and grow. Apple (NASDAQ: AAPL),, Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT) have led to such returns and become huge companies ̵
Is it too late to get on board? I don’t think so. With their competitive advantages, innovation records and huge amounts of free cash flow, I think these companies can continue to beat the market for years to come.
It may seem that everyone is already buying everything online, but according to the US Census Bureau, e-commerce accounts for only 16.1% of total US retail sales in the second quarter. This is the highest percentage of e-commerce retail so far, but still leaves significant growth for the Amazon online sales track.
The company continues to expand its delivery services, which pleases customers and puts pressure on the competition. Amazon Prime subscribers can now receive free same-day shipping for certain items with an order of at least $ 35. This is another benefit of a service that generates a large recurring revenue stream for Amazon. Subscribers pay $ 119 a year, and Amazon accounts for more than 150 million subscribers paying at the end of 2019. The company’s subscription services segment generated $ 6 billion in revenue in the second quarter, an increase of 28.6% year-on-year.
Although best known for e-commerce, the company’s most profitable division is Amazon Web Services (AWS), the market leader in cloud services. AWS accounts for nearly two-thirds of the company’s $ 14.5 billion operating revenue in 2019 and continues to give the company an engine for growth beyond retail. In the first six months of 2020, AWS revenues grew by 30.8% on an annual basis.
In the second quarter, Amazon reported $ 88.9 billion in total sales. That was a 40 percent increase over the previous year and shattered Wall Street expectations of $ 81.5 billion. Part of that growth could be attributed to COVID-19 and the growing desire of people to stay away from stores, but Amazon grew its top line by an impressive 26.3% in the first quarter before the effects of the pandemic began.
What could make investors even happier (and concerns about competitors) is the company’s free cash flow of $ 31.9 billion over the past 12 months. CEO and founder Jeff Bezos is constantly leading innovative efforts, and Amazon is making money to stimulate future growth, where one of the next goals is food.
From the original Apple computer to the Mac, iPod and iPhone, the company’s innovation and growth has been phenomenal. In January, Apple announced that it had more than 1.5 billion active devices. Although it did not provide general data for the iPhone, the company reported 900 million in January 2019.
These products have generated huge revenues and profits for years, but as the market saturates, sales growth for the iPhone, iPad and Mac stops. So Apple has stepped up its efforts to generate revenue from its vast user base in services such as the App Store, Apple Music and several others. In early 2017, CEO Tim Cook said he wanted Apple to double its service revenue by 2020. The company is on track to do so.
In its report for the third quarter in late July, management said that Apple had 550 million paid subscriptions, an increase of 130 million over the previous year. In the first nine months of fiscal year, Apple generated $ 39.2 billion in service revenue, compared to 2016 services total of $ 24.3 billion.
In addition to services, Apple’s “wearable, home and accessories” segment is growing rapidly. The category includes products such as AirPods, Apple TV, Apple Watch and Beats. In the first nine months of the fiscal year, it produced $ 22.7 billion, which means that Apple will double the category’s revenue in three years.
Apple has been producing a rich free cash flow of $ 71.7 billion over the past 12 months. This helps to pay a small dividend (yield of 0.73%) and provides money to stimulate future growth initiatives.
Microsoft shares have been in my portfolio for 15 years and this illustrates the strength of patience. In the first eight years of stock ownership – from the fall of 2005 to the end of 2013 – the technology giant rose only 33%, outperforming the S&P 500 by 47%. It then began to take off.
Fans of Microsoft’s history know what happened in 2014: Satya Nadela was appointed CEO, and that changed the state of the company.
The company has long been known for its Windows operating system and this remains a slow but steady machine for revenue growth. However, Microsoft’s greater growth is fueled by Azure, the second-largest cloud services platform behind Amazon Web Services.
In fiscal 2020, which ended in June, the “smart cloud” became the company’s largest revenue segment, generating $ 48.4 billion. That topped just $ 48.3 billion in “more personal computers,” which includes Windows. The Microsoft segment, which includes Office 365, is also closing for Windows, generating $ 46.4 billion in annual revenue.
Overall, Microsoft increased annual revenue by 14%, and operating revenue grew even faster, to 23%. The company has generated $ 45.2 billion in free cash flow, helping to pay a dividend that the company recently increased and now carries about 1%.
More importantly, just like Apple and Amazon, this cash flow gives Microsoft money to invest in its future and build on its competitive advantage for years to come.