One of the surest ways to explosive returns is latching onto a leader in an emerging technology or trend and owning them for decades. It is important, though, to be able to distinguish between significant developments and passing fads.
A company with a groundbreaking service, one that is producing significant scientific or technological breakthroughs, or a pioneer in a changing consumer paradigm can all reap rewards that could continue for years to come.
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With that in mind, I recommend investors consider Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG), Amazon.com, Inc. (NASDAQ: AMZN), and Netflix, Inc. (NASDAQ: NFLX). These aren't just idle endorsements, either -- I hold significant long-term positions in each of these companies.
The benefits aren't artificial
When it comes to artificial intelligence (AI), no company has the pedigree of Google parent Alphabet. The company was among the first to harness the potential of the AI technique of deep learning, which produces computer programs modeled after the human brain that can learn from reams of data. After pioneering its own research, Google acquired AI-start-up DeepMind, and it has since dominated the space.
The company has made numerous breakthroughs using this revolutionary process. It developed a system that bested human pathologists in detecting cancer in medical images, improved the process of genome sequencing, and even helped NASA discover new planets in a distant solar system.
While these discoveries won't necessarily improve Alphabet's bottom line, others have. Google used AI to help arrange servers on its data farms more efficiently. Encouraged by the results, the company fed a multitude of variables into the AI system with the aim of minimizing power consumption. By controlling the servers and the cooling system, and governing 120 condition-based variables, the system increased power usage efficiency by 15%, which resulted in a 40% decline in cooling costs. This move alone saved the company hundreds of millions of dollars. AI also improves the relevance of the company's flagship search.
Alphabet's self-driving car division, Waymo, is debuting a commercial ride-hailing service in Phoenix, having recently removed human backup drivers from these AI-infused vehicles. The service is being tested in 25 cities across the U.S. and could quickly evolve into a multibillion-dollar business.
While Alphabet develops ways to monetize this nascent technology, Google's search still pays the bills -- and business is booming. In its most recent quarter, revenue climbed to $32 billion, up 24% year over year, while adjusted net income jumped 28% to $6.8 billion.
A significant lead in artificial intelligence, a growing fleet of self-driving cars, and dominant position in worldwide search, Alphabet will likely still be thriving half a century from now.
Just getting started
The first online purchase was made less than 25 years ago, and digital retail is still in its early stages. According to the U.S. Commerce Department, e-commerce accounts for just 8.9% of total retail sales, up from 3.5% a decade earlier.
The 800-pound gorilla in the room is Amazon.com. The company, which began its life as an online bookseller, has emerged as the worldwide leader in e-commerce, and its growth continues at a staggering pace. Amazon currently generates nearly two-thirds of its retail sales in North America, and according to a report by analytics provider One Click Retail, the company captured 44% of e-commerce sales in the U.S. in 2017, and 4% of all retail sales nationwide. Amazon is continuing to pursue its international expansion, and if it can achieve similar results worldwide, the sky is the limit.
The company has another important segment contributing to its overall success. Amazon Web Services (AWS) is the leading cloud computing provider and the company's fastest growing business segment. Last year, AWS generated revenue of $17.5 billion, a 43% jump year over year, while its operating income grew 39% to $4.3 billion. What began as a side business produced 10% of Amazon's total revenue in 2017 and all of its operating income.
With a pole position in not one, but two quickly growing trends, investors will likely be celebrating Amazon's success even 50 years into the future.
A stream of profits
Just 10 years ago, streaming television and movies wasn't even a thing. Netflix first debuted the concept in mid-2007 as an add-on to its DVD rental business. Within a relatively short time, a "Netflix button" became standard issue on all manner of DVD players, televisions, game consoles, and other plug-in devices, and consumers began adopting the service en masse.
Fast-forward a decade, and Netflix has become the leader in the streaming revolution it pioneered. After conquering the U.S. market, where it currently boasts more than 50% penetration, the company set its sights on the rest of the world. The company currently sports over 117 million subscribers worldwide, and its ranks continue growing at a rapid pace. The company has captured the public imagination, even entering the popular lexicon with the phrase "Netflix and chill."
Netflix is working overtime to build out its global content library, spending over $6 billion in 2017 to develop original programs for its growing base of consumers. It isn't stopping there, as the company plans to invest between $7.5 billion and $8 billion this year toward its goal of 50% owned content.
These steps are producing concrete financial benefits as well, since original productions are more cost-effective on a per-subscriber basis. In its most recent quarter, Netflix posted revenue of $3.29 billion, up 32% year over year, while net income nearly tripled to $186 million. Average subscription prices rose 9% over the prior year, as recent cost increases took effect.
Netflix has doubled its domestic contribution margin from 16% in 2012 to over 37% in 2017. Compare that to 4.4% for its international markets, and the opportunity becomes clear -- the more customers it adds, the more money drops to the bottom line. Additionally, Netflix is the undisputed leader in the space, counting more than 61% of streaming video customers as its subscribers.
A commanding lead, a growing catalog, and improving financial metrics all show why Netflix will be rewarding investors for decades to come.
Five decades is a significant hurdle for an investment to overcome. No company is immune from disruption, and even with the significant advantages outlined above, there are no guarantees that these companies will still be thriving in half a century. While every company in a portfolio bears watching, each of these possesses a distinct competitive advantage in an emerging trend that should benefit investors for years to come, if not a lifetime.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Amazon, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Netflix. The Motley Fool has a disclosure policy.