This article was contributed to us by Willie Keng, CFA, Chief Editor at Dividend Titan.
Markets were a slaughter since the start of 2022.
I’ll tell you the worst hit stocks — speculative growth stocks. Followed by a huge drag on big U.S. tech blue-chips.
Not sure what’s good? I’ve decided to compile my top tech stocks ideas (including some of the best ideas I share with Diligence subscribers) to get you started here.
This is my ultimate insiders’ guide to the 10 best U.S. tech stocks to buy 2022.
There’s only one rule — these stocks must be highly profitable businesses that are “capital-efficient”.
Onward.
#1 MarketAxess Holdings (NYSE: MKTX): The Death of a 700-Year Monopoly
This might shock you – but the world’s biggest financial market is not the U.S. stock market. The U.S. stock market is valued at US$26 trillion. But the bond market even bigger…
Today, the U.S. bond market makes up $46 trillion in value. And bonds trade more than 3x the volume which stocks trade daily.
What are bonds? A bond is a type of loan (like an ‘IOU’). Instead of borrowing from a bank, companies and governments would use bonds to borrow money from investors. In return, investors get to collect interest payments every year or half year, called a coupon rate. If the money (principal) is not returned to investors, the borrower must declare bankruptcy.
Bond trading dates to the 13th century in Venice. And Venice enjoyed huge growth, wealth, and power from bonds. Today, bond trading, unlike stocks, are done “over-the-counter.” This means there are human brokers to help trade bonds. Unlike stocks where they are electronically traded.
The problem with human brokers is when banks got into trouble, no one was willing to trade these bonds.
And that was what happened during the global financial crisis.
A big opportunity for one of the largest online bond trading platforms
That’s why MarketAxess Holdings (NYSE: MKTX) was born.
This major electronic bond trading platform helps to close the gap in “over-the-counter” bond trading.
Source: ShareInvestor Webpro, Dividend Titan
Today, MarketAxess dominates 80% of all online corporate bond trades. The company uses its proprietary trading technology to help buyers and sellers trade bonds and other types of fixed income instruments.
MarketAxess’s business model is simple – every time a bond trades on its platform, MarketAxess takes a small cut. This is 0.02% of the transaction value. It seems tiny but the game MarketAxess plays is big volume. What’s more important is, as more money grows in the economy and due to inflation, the more MarketAxess collects its fees.
Over the last two years, MarketAxess achieved huge gains in trading volume – a 19%/year rise in revenues and 18%/year rise in earnings per share (EPS). Since 2011, MarketAxess grew a solid 14.5% compounded annual growth rate (CAGR) per year till 2021. And its earnings per share (EPS) rose 20% per year over the same period.
MarketAxess produces tons of free cash flow (FCF), gushing US$320 million of FCF over the last 12 months. MarketAxess can produce massive cash profits given its low capital costs to run its business.
Source: MarketAxess Financial Statements, Dividend Titan
Today, MarketAxess has more than 1,600 clients onboard its platform.
And almost half came from global firms. Because human brokers there’s only a limit to how much they can reach out to, MarketAxess does it at a fraction of a time. These speeds up transactions and creates more liquidity. And it improves pricing for the bond.
Now, it’s bigger competitor, Bloomberg offers a big electronic trading business in Europe. But the problem is Bloomberg’s functions are limited and allows trading with only a small group of brokers.
There’s still a lot of room to grow since…
MarketAxess represents just 20% of the market share in bond trading
Yet, the volume of bonds being traded daily has been growing…
You see, the crown jewel to MarketAxess business is its “Open Trading” platform. The platform cuts out the middleman, allowing participants to trade directly with each other with no “wholesale” broker in between.
While this is a super simple concept, no competitors have put this business model in action until MarketAxess entered the market.
And the more people use its platform, the better, because it means more trades. This provides a more accurate price of every bond traded. And its business grows. This is called network effect.
And this attracts more people to join.
More fees into MarketAxess’ pockets.
In earlier July, MarketAxess reported trading volume of $204 billion. This was 16% higher over a year ago during the same month. And over $230 billion government bonds were traded on its platform, thanks to its LiquidityEdge deal.
Online trading brokers play in a cutthroat price-cutting industry. But I see MarketAxess focused on a niche market – bonds. The industry is hard to break in and only a few brokers are in it. Once big financial institutions are used to one platform, they typically stick to it for a long time. Unlike the stock market, which is already electronic traded, the bond market is still progressing from “over-the-counter” to electronic trading.
With the COVID pandemic forcing people to work from home, there’s a huge need for investors to approach MarketAxess for their trading needs. This is going to be a massive tailwind for MarketAxess.
MarketAxess Holdings (NYSE: MKTX) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Read Also: Buying US Stocks In Singapore: Guide To Stock Trading Platforms And Brokerage Fees (2022)
#2 Visa (NYSE: V): This Rare Bird Gave Birth to New Streams of Income for Shareholders
You know what’s one business I avoid? It’s the one where…
It tries to drain me of every dollar in my pocket.
You sink a dollar into a business, but you get a lousy return. Or worse, the business gives you 0 returns (and losses). My money gets stuck buying these losing stocks. And I lose out on other more profitable opportunities.
So, what’s a business I like? The ones that produce a good return on each dollar of capital invested. Now, these are called “capital-efficient” businesses. They only need to put in small amount of capital. Yet it produces ever rising profits year after year.
Are there such businesses with the gift of massive “capital-efficiency”?
Yes. I call it a rare bird.
Warren Buffett calls it a “dream business”. And Warren Buffett bought into one such company as early as 1972. In fact, he mentioned this again in his letters to shareholders in 2007.
See’s Candy is that prototype of a dream business. This is a boring chocolate business. But it only uses a small amount of capital to produce giant profits. I’ll show you.
In 1972, See’s Candy used US$8 million of capital to run its operations. It was making US$30 million of revenues and less than US$5 million of profits per year. Its return on capital was a whopping 60%. In 2007, See’s Candy made over US$383 million of revenues and US$82 million of profits. In 35 years, this chocolate company accumulated US$1.35 billion of profits with just US$32 million used in the business.
Too bad, See’s Candy is a private company.
Well, there are other rare birds like See’s Candy in the stock market. And what’s even better…
This one rare bird is an “inflation-hedge”
Consider this: during its latest 4Q2021 results, this other company’s…
- Revenues grew 29% to US$6.6 billion compared to last year.
- Net profits grew 68% to US$3.6 billion compared to last year.
- And processed a total 45 billion transactions globally, up 21% compared to a year ago.
That makes it…
The world’s biggest payment network operator in the world
Visa (NYSE: V) is the other US$430 billion rare bird. Over the last 10 years, this payment network operator used US$14 billion of capital.
Yet it grew net profits from US$2 billion to US$12 billion. That’s a 476% increase. In other words, Visa only used a small capital to accumulate total profits of US$77 billion over the past decade. That’s a 70% return on every dollar of new capital.
Well, if you owned shares of this company since 2012, you’d gain a massive 682% returns. That’s a 23% compounded annual grow rate.
Source: ShareInvestor Webpro, Dividend Titan
For a small amount of capital, Visa was producing big profits. In fact, over the last 5 years, Visa produced an average US$10 billion of profits a year.
This is also the world’s most recognised, licensed global financial services brand.
So why is this company an inflation hedge? You see, the more people spend their money buying products and services using their Visa debit and credit card, the more money Visa makes. Now, what you need to know is Visa merely licenses their brand to banks (that’s why you see the logo on credit cards) and gets a fee for processing the transaction.
But more importantly, no other payment businesses can overtake Visa. In other words, the more money that exists, the more money Visa makes. And it makes perfect sense it’s perfectly correlated to inflation.
Like Adam and Eve kick-started an activity that led to 7.7 billion humans…
Visa gave birth to many new streams of income for shareholders. I take the bible saying: “to be fruitful and multiply” seriously.
Last year, Visa transacted more than U$15 trillion from more than 160 billion transactions (compared to 50 billion transactions just 12 years ago). True, Visa doesn’t have the track record to compare with inflation since this financial technology company was only listed in 2008.
But it’s the perfect company to beat inflation.
What’s more, it only needs little capital to produce giant profits, while getting paid based on its transaction volume. People will spend more. And as things get more expensive, prices go up, Visa takes a larger piece of the pie. Even digital wallets cannot come close.
In fact, Visa is a complementary to digital wallets.
The reason is simple: Digital wallets are “peer-to-peer” services. This means you can only transfer cash and ‘points’ if the other party has the same digital wallet as you.
The problem is consumers may accumulate so many points in the wallet that you have only a few merchants to spend these points on. In other words, not many merchants offer the same digital wallets (for example, GrabPay, AliPay, Nets, PayLah, Dash) today.
Visa solves this problem by enabling digital wallets to go through Visa’s network so you can spend all your points and cash with merchants who have a Visa-enabled network. Not necessary the same digital wallets.
That means, merchants still need Visa to run their businesses.
The other big reason why merchants cannot stop using Visa is this: there’s simply no other companies that has a safe, secure ecosystem that allows transactions to be approved between a merchant’s and customer’s bank. Visa approves this under their own network.
Visa is the “railroad” network that allows the money train to move from one bank to the next. Note: Visa is different from payment processors — Square, PayPal, and Stripe — they are “point of sales” systems (that’s story for another day).
As long customers pay through a credit card or digital wallet, merchants need a payment network operator.
Even if merchants decide to stop accepting Visa, they will still have to face rising fees.
Visa (NYSE: V) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
#3 PayPal (NYSE: PYPL): Buying One of the Biggest Payment Processors
I’ll tell you what PayPal is not. PayPal is not a digital payment network operator. This is one of the biggest digital network payment processors in the world. There’s a difference.
I’ll explain.
PayPal started in 1998 and went publicly listed in 2002. It was bought over by eBay later, valuing the company at US$1.5 billion.
In 2015, eBay sold off PayPal.
At US$116 billion market cap, PayPal is one of the biggest Fortune 500 companies.
PayPal started by creating a net worth of merchants and consumers for e-commerce. And its growth was turbocharged by the huge shift toward digital payments and e-commerce rise. More crucially, over the last two years the COVID pandemic has further accelerated the global shift toward e-commerce.
And PayPal is a big beneficiary of this tailwind.
PayPal is somewhat a unique player in the payment’s processor space. It’s a highly scalable business. And once a payment platform is established, there is little incremental cost to additional transactions.
Over the last 12 months, PayPal has produced total payment volume (TPV) of billions of dollars in annual volume. And within the e-commerce space, PayPal is the clear winner.
As of 2021, it has 426 million active accounts and 34 million merchants. This gives PayPal a very strong network effect. And this is a big advantage. And so far, PayPal is still considered the preferred payment processor in the online world. Why? Convenience and security.
This is more crucial for users and merchants. Think about this: the quickest way to a transaction is to make sure that each online payment is safe. Knowing the other side will honour your payment and deliver the product or service. And at the same time, knowing that PayPal protects users from hackers.
Here’s the thing: PayPal is a capital-efficient business. It doesn’t need a lot of capital to run its operations. That’s why its return on invested capital (ROIC) has grown over the last few years. In fact, over the recent five years, PayPal’s ROIC averaged 32% a year. It’s impressive.
In its latest 2021 results, PayPal has produced fantastic results. PayPal produced a solid US$25 billion revenue, 18% higher than last year. It’s operating profit margins is around 17% and produced operating cash flow of US$6.3 billion, higher than US$5.8 billion last year.
You know, PayPal only poured in less than a billion dollars of capex into its business to gush such powerful cash flow.
According to management: “2021 was one of the strong years in PayPal’s history. We reached US$1.25 trillion in Total Payment Volumes (TPV) and launched more products and experiences than ever before. The future is moving in our direction…”
Management has also said PayPal’s payment volume will grow another 19% to 22%. Its revenues will grow another 15% to 17% and the company will add new accounts of around 20 million by end of this year.
PayPal shares is down 67% since last July 2021.
Source: ShareInvestor Webpro, Dividend Titan
Shares are clearly stuck in the bargain bin because the stock market is obviously nervous about interest rates destroying technology companies.
Rising interest rates affect loss-making technology companies more than the highly profitable ones. And PayPal is one of the most profitable digital payment processor businesses in the world.
PayPal (NYSE: PYPL) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
#4 Microsoft (NYSE: MSFT): The Boy Who Dropped Out of Harvard
Computer software is probably the easiest to scale.
Think about it. Once you write a computer program, it costs very little to recreate and distribute it. You don’t need to buy raw materials, hire people, or build factories. A company, which owns the right computer software, is a highly-cash generative business.
And Microsoft is the world’s largest computer software market.
In 1975, Bill Gates co-founded Microsoft with his childhood buddy Paul Allen, after dropping out of Harvard at 19 years old. 5 years later, Microsoft’s meteoric rise started when IBM asked it to create an operating system (OS) for IBM’s computers.
Microsoft is not new to us. Remember the good old days of Windows 95? And how we were all taught to use Microsoft Office in school?
Source: ShareInvestor Webpro, Dividend Titan
Computer software is probably the easiest to scale.
Think about it. Once you write a computer program, it costs very little to recreate and distribute it. You don’t need to buy raw materials, hire people, or build factories. A company, which owns the right computer software, is a highly-cash generative business.
And Microsoft is the world’s largest computer software market.
In 1975, Bill Gates co-founded Microsoft with his childhood buddy Paul Allen, after dropping out of Harvard at 19 years old. 5 years later, Microsoft’s meteoric rise started when IBM asked it to create an operating system (OS) for IBM’s computers.
Microsoft is not new to us. Remember the good old days of Windows 95? And how we were all taught to use Microsoft Office in school?
The “Microsoft in Chief”
Today, Microsoft has evolved into 3 major business segments –
- Productivity & Business Processes (Microsoft Office, Office 365, SharePoint, Skype, LinkedIn)
- Intelligent Cloud (Azure, Windows, Server OS, SQL Server)
- Personal Computers (Windows, Xbox, Bing, display ads, laptops, tablets, and desktops)
I know a lot of investors have soured on this company before, because its products have been playing catch up. But things have turned around for Microsoft.
Since Satya Nadella took over in 2014 as new CEO, Microsoft transformed itself into a cloud behemoth. Satya Nadella pushed new barriers. moving from the traditional licenses to the more popular subscription model.
While Microsoft has exited its less profitable, low margin mobile handset market, it’s also shifting Gaming to be more cloud-based.
The result? Massive sales growth and fatter profit margins.
Let’s dive deeper. The focus on cloud was a right direction. It’s a huge trend that IT environments will be “hybrid-based” in the future — using both onsite servers and cloud.
Considering the IT backbone of many big companies today is still built on Microsoft Server, it makes customer switching even harder with the company’s cloud-based solutions – costs, time and risks are major considerations to switch.
Azure is the anchor piece for Microsoft’s Cloud segment. Azure makes it painless for clients to navigate within cloud and allows Microsoft’s suite of software solutions to be onboard onto its platform easily. It’s also cheaper for clients to move workloads to clouds now, given lower upfront costs and easier maintenance.
This is Microsoft’s secret weapon. It currently has the biggest global data center footprint – 54 locations worldwide. And with compliance regulations getting heavier in many countries, there’s a huge demand for local data storage.
Sales growth is huge for Microsoft’s Cloud segment. Cloud accounts for $39 billion sales in 2019, versus Productivity and Business Process which is $41 billion, and Personal Computers which topped $46 billion last year.
The highly profitable bread and butter solution
Microsoft’s core strength — Productivity and Business Processes still dominates the market with Microsoft Solutions.
While its peers like Alphabet are aggressively trying to steal Microsoft’s share away, you’ll notice most enterprise clients are religiously sticking to Microsoft’s traditional software.
And Microsoft’s answer to Alphabet’s Google Doc and Spreadsheet is its own Office 365, proved very popular among white-collar work offices. Office 365 has already clocked more than 165 million subscribers.
Microsoft’s free cash flow (FCF) is massive. FCF grew from $25 billion in 2011 to $45 billion in 2020. Because of its growing network effect and strong branding, the business requires little investment to grow rapidly.
This is a low capital cost business. And it results in very high return on invested capital (ROIC). ROIC grew from 11% in 2015 to 25% in 2020. Microsoft treats its shareholders well – increasing dividends from $0.61 per share in 2011 to $1.99 per share in 2020.
That’s not all. Microsoft has repurchased shares — $12 billion in 2017, $11 billion and $20 billion in 2019.
The IT industry is well-known to be cutthroat. Microsoft must drive higher sales growth with careful acquisitions. So far, notable ones like LinkedIn, though expensive has proved to be working out. Another is GitHub, a strategic investment it mad recently. But the jury is out whether it will prove to grow earnings.
Microsoft (NYSE: MSFT) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Read Also: Guide To How Singapore Investors Can Start Trading US Stocks With Little Money
#5 Apple (NYSE: AAPL): Buying A Consumer Electronic Giant
This is what’s interesting – demand for the latest iPhone 13 and MacBook Pro pushed this company’s revenue higher.
This is one of the biggest electronic consumer companies in the world. Even Warren Buffett’s investment company has a stake in it.
At US$2.5 trillion market cap, Apple (NYSE: AAPL) sells revolutionary products, including the iPhone that has created one of the biggest ecosystems today. It got people to transition computing habits away from the traditional desktop PC.
Today, the robust app store helps in iPhone adoption and grow Apple’s userbase, with many applications from productivity, social media, gaming, music and so on.
Apple’s ongoing business comes from existing customers versus new smartphone adopters. The thing is hardware is increasingly becoming commoditized and replacement cycles are also getting longer.
That’s why Apple is now focusing on newer software and services to augment user experience and retain customers. Today, Apple has a range of products and services including the Apple Watch, iCloud, Apple TV+, AirPods and Apple Pay.
I’ll say Apple’s competitive advantage comes from its ability to put all its stuff together – hardware, software, services, and third-party applications into a stylish, appealing devices. This allows Apple to place a premium on its hardware, unlike its peers.
And that’s why Apple’s revenues could not only double from US$156 billion in 2012 to US$365 billion last year, but it also produces a solid average operating profit margin of 30% last year.
Now, the key economic moat for Apple is that it has a high switching cost. Customers who are users of Apple – iPad, Apple TV, Apple Watch, AirPods and so on are already entrenched into the ecosystem.
According to a 2018 survey by Kantar, 90% of U.S. based iPhone users say they plan to remain loyal to future Apple devices. What’s more because of “closed system” for its popular iOS, Apple can charge a much higher premium for its hardware versus devices sold by Samsung, Dell, HP and so.
Apple Inc (NYSE: AAPL) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Source: ShareInvestor Webpro, Dividend Titan
#6 Netflix (NYSE: NFLX): How to Buy the World’s Biggest Streaming Business
Here’s the thing: Netflix (NYSE: NFLX) stock has fallen more than 40% since its November high.
And the interesting thing is Bill Ackman bought a 3.1 million stake valued at US$1.1 billion in Netflix.
This is probably biggest trade of the year for Bill Ackman. Bill Ackman is one of the top 20 shareholders of the company.
If you don’t know who Bill Ackman is, he runs one of the biggest hedge funds in the U.S. He was famous for calling a short on many financial companies during the global financial crisis, made huge bets on some of the more renowned stocks. And is a successful activist investor.
And now, he’s looking to capitalize on one of the biggest streaming businesses in the world.
This investment came right after the stock dropped another 20%, with the company warning that subscriber growth would slow down massively.
Like what Bill Ackman said: “Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon.”
You know what? I agree.
Streaming businesses have scale.
And it has the potential to attract subscribers and charge them at a modest rate. With its huge pipeline of content, Netflix is pulling away from its competitors.
Here’s the story: Netflix started out as a DVD rental business by mail. And it has evolved to become the first in subscription video on-demand business. Today, it’s the largest online streaming video provide in the world.
At US$151 billion market cap, this is the largest on-demand TV provider in the world (except China). Netflix has grown fast into markets across the world and has more subscribers out of the U.S.
What’s interesting is the company uses its massive scale to create huge data to track customer interaction. It then leverages on these data to provide better experience and content.
In its recent filings, it has over 130 million subscribers globally. Each content helps to engage its viewers and customers. And at the same time, it attracts customers through “word of mouth” — the most powerful marketing.
It grew so fast that its revenue rose massively from US$3.6 billion in 2012 to US$29 billion last year. It’s impressive.
The company has been improving its profit margins as it continues to scale up the business – adding more paid users into its ecosystem.
The company also started turning free cash flow positive in 2020, a sign that its scalability is coming to fruition. Now, here’s what I like about Netflix – its return on equity (ROE) has grown from single-digit to double-digits in the last 7 years.
Last year, its ROE is 38%. And that means for every dollar of equity put back into the business, Netflix produces about US$0.38 of it. I say it’s solid.
Netflix (NYSE: NFLX) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Source: ShareInvestor Webpro, Dividend Titan
Read Also: 13 Netflix Shows That You Can Watch To Learn About The World Of Finance
#7 Meta Platforms (NYSE: FB): How to Own the World’s Data of Tomorrow
It all started with a website called “Facemash” in 2003. And the whole idea was to compare who was “hot or not” by placing two photos side by side. Then asking users to choose the “hotter” person. It was for fun.
But Harvard University saw it as a breach in security and violated individual privacy that Facemash was made to shut down.
Facemash was relaunched in 2004. But this time, it became a student directory. Users can create profiles of themselves — upload photos, add personal information of themselves. It became a simple, social networking site. By the end of its first year, thefacebook.com had 1 million accounts.
And the site changed its name to “Facebook”. And that’s the start of the world’s most valuable network today.
I’d say Meta Platforms (NYSE: FB) is an accidental growth company. No one would have expected, not even Mark Zuckerberg to know that Facebook would be a trillion-dollar company. What turned out to be a harmless, student directory website made use of Metcalfe’s Law and transformed itself into an internet behemoth.
In 2006, Facebook was released to the public. And in two years, it became the most popular social network in the world, destroying the next most popular social network site, MySpace.
In 2010, Facebook had already gotten more than 500 million users. It reached 1 billion users in 2012, just eight years after it first launched to the public. And during that time, the company got listed in the U.S. stock exchange at US$100 billion — the largest U.S. tech IPO valuation in history.
Since 2012, Facebook’s shares have risen close to a 1,000%.
Source: ShareInvestor Webpro, Dividend Titan
For many people, they have yet to understand what makes Facebook so valuable.
You see, the internet is the next most important modern invention after electricity. The ability to engage and communicate in real time, in a same channel is a massive invention of our time.
This network where every individual can be linked up in the world is just mind-boggling.
How Facebook make money… The Facebook way
Now, what made Facebook different wasn’t just its network effect.
The thing is, MySpace was the biggest social media website in the world in the mid-2000s. At that time, it also allowed users to connect with each other — upload their photos, add description, create posts.
But there were many problems.
MySpace loaded its website with so many ads that it made the website slow and hard to use. Basically, MySpace tried to monetize its users too soon, and that frustrated a lot of users. MySpace turned into an “ad-infested” website.
The other thing was, MySpace didn’t police its website well. It allowed people to create many fake accounts, so people could hide behind a fake profile. It grown into a “dodgy” website that people didn’t feel great to use. Advertisers pulled back.
Facebook, on the other hand, learnt from MySpace’s mistakes.
Mark Zuckerberg was patient.
He made sure Facebook was able to grow a consistent pool of users. And allowed users a safe and clean space to use the social networking website. Mark Zuckerberg made sure the user experience was good.
In 2008, Facebook had more users than MySpace. At some point, Facebook knew it had to make money.
Supporting a billion users require a need for servers, data storage space and network facilities. Mark Zuckerberg decided the advertising model to generate revenues for the company, so that it could buy the servers to support the large amount of data.
Facebook’s advertising model is simple: It charges advertisers the right to access to its users. And this user base is very valuable because Facebook knows a lot about them. It knows their traits — what they like, their habits, their preferences, their location.
This allows advertisers to better target their advertisements to the right customers. It also allows advertisers to save costs this way.
For example, if Facebook figures out, you’re 40 years old and you “like” BMWs, watch Football and Pigeon baby bottles, then it “knows” you could be a perfect fit for an advertisement for a premium child’s car seat.
Facebook doesn’t place ads like how MySpace does.
It makes sure it integrates ads like any other Facebook posts. This keeps you engaged. They call it “interruptive marketing”, but Facebook does it discreetly.
Actually, Alphabet (NYSE:GOOG) does almost the same thing with its targeted advertising. But it uses your search history as a data point. On the other hand, Facebook captures all your data — your friends, your photos, your posts, your shares. Facebook everything an advertiser needs.
That’s scary.
An impressive “capital-efficient” business
Meta Platform’s balance sheet is in an almost perfect condition.
It has no long-term debt. And it holds more than US$60 billion of cash (including investment securities).
It continues to reinvest capital in the business.
Source: Meta Platforms Annual Reports, Dividend Titan
In fact, since its IPO in 2012, Meta Platform has reinvested about 40% of its capital into the business. And this allowed it to produce a total US$104 billion of net earnings since IPO.
In 2011, Meta Platform generated US$3.7 billion of revenues and produced US$1 billion in net profits. Last year, it produced US$85 billion of revenues and US $29 billion of net profits. That’s a massive growth in the past 10 years. And continues to keep growing.
This is the kind of growth Amazon was generating years before.
But the difference is: Meta Platform actually gets to keep a lot more money. Over the past 10 years, Meta Platform gross profit margins was 81% and net profit margins was 25%. Most of its revenues flowed down to the bottom line.
When a company defies the “law of capitalism”, it not only grows bigger and bigger, but it has a far larger profit margin than competitors in the industry.
These are outstanding numbers.
Why is Meta Platform’s business so strong?
Facebook is one of the Gorillas of the FAANG stocks. But what people don’t fully understand is the power of Meta Platform’s strong “network effect”. You see, Meta Platform runs a simple advertising model.
And advertising model works if there is a strong traffic (or readers). Just like traditional newspapers.
Newspapers hire a team of journalists to dish out fresh news every day. This keeps readers coming back for more content. And this allows newspapers to leverage on the high readership to sell advertising space.
Meta Platform can do all that at a much lower cost.
With the power of the internet, Meta Platform doesn’t need to hire a team of writers.
All it needs is to get people onboard its platform and start posting. 2.5 billion users posting, sharing links, pictures and videos are free content for Meta Platform. And as the world get connected and engaged, people are curious about other people’s life. It’s normal human behaviour.
That’s why social media is so addictive.
This way, Meta Platform doesn’t need to invest heavily, in marketing and sales. But it must continue to buy new servers, network facilities and data centres to store all the data on cloud.
To make its business run more efficiently.
That’s why, last year, Meta Platform generated so much free cash flow, that its free cash flow is close to 30% of its revenues.
In other words, Meta Platform gets to keep a third of every dollar of revenue it collects from advertisers.
Meta Platform has truly created a network effect for itself. Users get to engage in Meta Platform platform. Advertisers see the huge market that Meta Platform has and willing to pay top dollars to get their products in front of their users.
I’ll say Meta Platform is one of the most capital-efficient businesses I’ve seen. And one of the fastest growing. As a result, it gets to grow its advertising business in an efficient way.
Meta Platform allows big brands and small creators to self-manage their advertising to initiate and manage campaigns. So, Meta Platform doesn’t even need to hire people to administer the advertisements. This is vastly different from traditional print media.
I’d say Meta Platform’s advertising technology is among the best in its field.
Meta Platforms (NYSE: FB) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Read Also: 8 Trading Communities & Facebook Groups For Traders In Singapore
#8 Alphabet (NYSE:GOOGL): The Biggest Search Engine in the World
Today, Google Search controls at least 66% of search engine market share. Its Google Chrome browser (amongst all the other web browsers in the world) dominates the industry.
Since 1998, there are trillion of searches on Google. And the company continues to invest deeply in AI and other proprietary technology to make users’ Search experience possible.
Search engines are not new. But what Alphabet has is the persistent innovation that allows them to dominate its peers like Yahoo! and Microsoft’s Bing.
Alphabet isn’t a “one-trick pony”
Alphabet (NYSE:GOOGL) is more than just a search engine. Today, this tech giant owns many other businesses.
First, its Android mobile operating software system is the leader in the global smartphone market. It runs at least 70% of all shipped smartphones versus Apple’s iOS.
In 2020, global smartphone sales that run on Android already dominate with 85% market share. That’s more than a billion smartphones that use the Android operating system.
Source: Visual Capitalist
Next, Alphabet also owns the highly popular YouTube, which it bought for US$1.65 billion more than 15 years ago. People come to YouTube for entertainment, information, and opportunities to learn something new.
Today, YouTube has more than 800 million monthly active users (MAU). This makes YouTube the second-most visited website on the internet. Just behind Meta Platform’s Facebook. YouTube accounts for at least 33% of all internet users.
If you’re connected to the internet, I bet you’ve used one of Alphabet’s cutting-edge services.
How Alphabet makes money
Now, what powers Alphabet’s cash flow is its advertising business. Alphabet is a giant digital advertising agency.
Let me explain.
There are two ways that Alphabet makes money:
- Performance Advertising: Every time a user clicks on a specific advertisement that are relevant and directed at them, advertisers pay Alphabet. This unique “ad-tool” allows improved matching of advertisements to the right audience. And allows Alphabet to profit whenever users visit a website or click on ads. The better the matching, the better for advertisers, the better for user experience and Alphabet makes money. It’s a win-win-win philosophy.
- Brand Advertising: This helps enhance users’ awareness of and affinity with advertisers’ produces and services. Alphabet helps advertisers deliver videos and other ads to targeted audiences. Through Alphabet’s network, it helps advertisers post their ads on other websites and its own popular services. What this means is advertisers can reach to billions of people across the world publishing its online ads. Alphabet’s products and services deliver massive value to the world today.
And here’s the tailwind of Alphabet: digital advertisement is one of the most profitable industries today in the world.
Especially with the COVID pandemic, more and more businesses and consumers are buying and selling things online. Businesses have greater need for digital advertising.
And Alphabet is set to capture this habit-forming service.
In fact, companies today spend at least US$330 billion on digital advertising a year. That’s the size of Singapore’s GDP. It’s massive.
Alphabet’s online advertising business keeps growing. As more people use its Search engine and YouTube platform, its revenues continue to grow.
Let’s get down to the financial numbers
Like all capital-efficient businesses, Alphabet produces some world-class net profit margins — in this case north of 20%.
Net profit margin is revenues minus all costs (including taxes), then divide by total revenues. Net profit margin is the bottom-line profit.
Not many businesses can achieve such numbers.
You see, Alphabet’s Google Search engine business is a scalable one. And Alphabet has made Google the “de-facto” search engine. The reason why it can do this is because it has a huge team of engineers to keep improving its technology — by aggressively matching users to relevant information results.
Users like the speed and relevant information that Google’s engine brings. And once users are comfortable with Google, this forms a habit that keeps users coming back for more.
Alphabet’s operating costs are fixed. As more users use Google, every incremental dollar of revenues collected from advertisements can be converted into profits. That’s why Alphabet can continue to grow higher profits. And expand their profit margins.
What other signs tell me Alphabet is in the right hands of a capable management? A consistent double-digit return on equity (ROE). Its ROE, on average is 16% a year over the last 10 years.
What qualifies Alphabet as a capital-efficient business is this: every incremental dollar of capital must produce ever higher profits for the company.
Hear this: Alphabet poured in a total US$93 from US$97 billion in 2011 to US$76 billion in 2021.
Its return on incremental capital is a massive 70%.
Simply take net profits of US$76 billion divide by the incremental capital of US$201 billion.
And because it reinvests 46% of its earning into the business, Alphabet can compound its intrinsic value at a rate of 33% a year. That’s why, over the last 10 years, Alphabet’s shares have grown at 25% annual compounded.
That’s impressive.
I believe Alphabet can continue to compound its profits and share price for many years to come.
Source: ShareInvestor Webpro, Dividend Titan
In fact, over the last 5 years alone, its revenues already more than doubled.
What Alphabet has also is its fortress-like balance sheet. Because it produces so much cash, it doesn’t need to borrow much debt.
In fact, it only has around $14 billion of debt. And has over US$140 billion of cash (including “ready-to-sell” investments). Alphabet makes money. And tons of it.
Here’s the Most Crucial Piece to the Investment Puzzle
Alphabet is “asset-light.” It produces huge growth without ever needing to invest in expensive assets to support the business. That’s why, using my favourite metric — free cash flow (FCF), Alphabet produces a very high FCF.
FCF is the residual cash that’s left after Alphabet pays all its operating costs. It shows exactly how much cash has Alphabet produced, minus off how much cash has been used for capital expenditure.
Great managers know how to use FCF to grow its business, pay down debt and reward shareholders with dividends and share repurchases. And the thing is, Alphabet’s FCF keeps growing over time.
In my opinion, Alphabet’s business model is one of the best. Search and YouTube are its key drivers of growth.
And it will continue to generate cash flow for investors for many years to come.
Alphabet (NYSE: GOOGL) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
#9 American Express (NYSE: AXP): Buying Prestige, Service, Security
American Express goes a long way back as a horse-back mail express business, founded in 1850. It used to carry many highly valued items like gold, jewelry, and stock certificates for the wealthy people. And it had a world-class delivery service.
In 1958, it launched its first “charge card”. Throughout history, American Express prides itself for its reputation as a brand for the elite. Using travellers’ cheques and credit cards were a symbol for the affluent in the 1970s. It was all about “Prestige, Service, Security.” And I do think their customer service, at least in Singapore is way better than the other credit card companies.
I even remembered the famous American Express TV in the 1980s — “Don’t leave home without it.”
You see, American Express is very unique. It is both a digital payments network operator and a bank. This combination gives it power to form its own “closed loop” network.
A “closed loop” network allows the company not only to act as a payment processor, but also issues its own credit card. American Express can lend money to its own pool of customers.
This is one massive source of economic moat here. And this doesn’t appear in the financial statements.
Unlock the profitable “close-loop” system
To understand its business model, let’s do a simple comparison with American Express. closed-loop system and open loop systems.
Let’s talk about the conventional “open loop system”.
For example, you own a Visa credit card. When you buy home items for $1,000, the shop is going to pay 2% to Visa and its merchant bank. Here’s a breakdown of the $20 fees.
- Visa facilitates the transaction and collects $17.50
- Shop’s merchant bank collects $2.50
- Credit card issuing bank: Collects $0 unless you did not pay your balance on time. Then the bank makes money from accrued interest.
The shop is willing to pay $20 in fees because it knows customers will use credit cards to buy their “high-ticket” home items. I don’t think I’ve ever seen someone carry an envelope full of cash to pay for a coffee table or a bed.
This is where it gets interesting. If you pay off the entire balance on time, your credit card issuing bank makes nothing from you. That’s why you see a lot of credit card salespeople on the street, getting people to sign up regardless of their financial background. The bank hopes some of these cardholders will eventually roll over their balance.
Now, here’s where American Express is different.
If you pay the $1,000 with your American Express card instead, the shop has to pay American Express a fee of around 3%, instead of the usual 2%. This is because the shop knows American Express cardholders tend to be wealthier, and willing to spend more.
You see, American Express controls the entire payment value chain in its own ecosystem. And American Express makes more money than Visa from 3 distinct revenue sources —
- Merchant fees — $27.50
- Card fees — Cardholders must pay an annual fee to use AMEX cards.
- Loan income — If the cardholder doesn’t pay off the balance on time.
And if a cardholder doesn’t pay off their balance on time, American Express also earns the accrued interest.
So American Express serves its customers at every part of the payment value chain. From using its credit cards to payments, to borrowing cash in large amounts. This allows it to capture a loyal, affluent customer base, including many big corporations.
It attracts not only the wealthy… and the smart investors
American Express focuses on “high-ticket” corporate transactions and wealthy businessmen. For around 80 years, the company has been issuing travellers cheques. And these were the people who could afford holidays in Europe.
Today, American Express has one of the largest fleets of airport lounges worldwide, including its 7 gold standard Centurion lounges.
American Express also collects about $4 billion of card fees from its customers simply by giving them the right to carry their card. And this amount has been rising each year.
American Express is so powerful even Warren Buffett understood this.
During the “Salad Oil Scandal”, he knew about the intangible assets of American Express being able to weather the scandal. Because of Warren Buffett’s strong investment acumen, he ploughed 30% of his Buffett Partnership’s money into American Express.
And he sold the stock later for a handsome 30% annualized gain.
Of course, he regretted selling it early. And he bought back the stock again in 1991, This time round holding it for the long term.
In 2017, Forbes named AXP the 23rd most valuable brand in the world — worth around $24 billion. That’s almost a third of its mighty $80 billion market cap.
American Express (NYSE: AXP) is one of my 10 Top U.S. Tech Stocks to Buy for 2022.
Source: ShareInvestor Webpro, Dividend Titan
#10 Nvidia (NYSE: NVDA): The Engine Behind The Future
The future of transport is such — you’ll never have to drive to work again. And right now, the world is at the unstoppable trend that is set to transform our daily commute.
There’s no need to be on the steering wheels or focus on keeping your eyes on the road. And when travelling, you can spend time playing with your kids, reading a book or simply streaming videos, and watching them on your smartphone. In fact, think about catching up your emails even before you reach your office.
It seems like a far future, but it’s a lot closer than you think.
I’m talking about self-driving cars.
And experts say it’s going to happen sooner than you think. The real story is not what it can do for you. But what’s exactly going on inside the car.
You see, self-driving cars originally are needed to “memorize” maps and how to control the car — accelerate, break, and steer. It’s going to take at least a few hundred years for programmers to key in all the possible steps and scenarios. To teach the car what to do and how to “think”.
And it’s hard. But there’s one giant tech company who can solve all this today.
Think about this. Nvidia’s technology is so advanced that it can estimate a tracking range for different vehicles and even people and cyclists along the walkways. This means, it can predict future motion of vehicles, objects, and people. Even dogs and cats. So, this allows it to automatically calculate how much to speed up or put the brakes on the self-driving vehicle.
Then once you integrate all the fixed objects like traffic lights, lamp posts, and so on, a self-driving car can reasonably navigate around the city. It’s a lot like exploring in a video game. The only difference?
This is real life.
But that’s just the tip of the iceberg.
As Nvidia’s technology continues to learn about self-driving cars and how different scenarios play out, it can learn how to react to different scenarios.
And this company well-known for making one of the best gaming graphic cards in the world — it’s a special type of chip that works.
I’m talking about U.S.-based Nvidia (NYSE: NVDA). At a market cap of US$536 billion, this is one of the biggest technology giants today.
Now, what Nvidia is simple in concept. It uses the concept of video games from the gamer’s point of view, then it tracks real-world objects to predict their motion from the perspective of the driver.
Self-driving cars are one big potential for Nvidia. But let’s not forget its gaming is still big business, especially for the Metaverse.
Nvidia shows no signs of slowing down today. As its data center continues to grow. It’s latest fourth quarter results were impressive. For instance, Gaming and data center — Its revenue recorded U$7.6 billion, up 53% over a year earlier. Overall last year, total revenues were up 61% compared to last year.
And management said: “NVIDIA is propelling advances in AI, digital biology, climate sciences, gaming, creative design, autonomous vehicles and robotics — some of today’s most impactful fields.”
Over the last 10 years, NVIDIA growth has been impressive. While many average companies produce a steady free cash flow. NVIDIA had to only spend a total of US$3.7 billion in capital expenditure, but it could grow its free cash flow from US$770 million in 2012 to US$4.7 billion in 2021.
That’s impressive.
That’s why over the last five years, its return on invested capital has produced on average 28%. And because of its cutting-edge technology and the huge demand that requires Nvidia cards to power, it has a huge 60% gross profit margins. Frankly, this is the kind of profit margins I want to see for technology companies.
But that’s not all. Its revenues over that same period has more than quadrupled and has produced close to 10x its net profits as compared to 10 years ago. That’s massive.
This is one of the most powerful capital-efficient business. And that’s all thanks to its gaming graphic cards and the potential for the Metaverse and self-driving cars.
I’d say this is a great company to be in.
And its business is right at the forefront of technology — gaming graphics card and new frontier technology.
Think about it, Nvidia hasn’t even got started. According to IHS Markit, there are around close to 100 million cars and trucks globally in 2017. For every graphics card that Nvidia needs to put inside, it’s going to cost these car markers at least a US$1,000 to make. Think about the potential that Nvidia has.
Nvidia (NYSE: NVDA) is one of my 10 Top U.S. Tech Stocks to Buy for 2022
Source: ShareInvestor Webpro, Dividend Titan
Willie Keng likes to daydream. Well, he’s a human being with emotions after all. But he also likes sharing insanely practical, investing tips and stock ideas. Twice a week. No fluff. Willie runs a financial blog called Dividend Titan that helps DIY investors grow their wealth safely. He’s a CFA charter holder.
The post 2022 Guide To Buying 10 Best U.S. Technology Stocks appeared first on DollarsAndSense.sg.
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